P10-3

(a) Project X

Project Y

PVn = PMT (PVIFA15%,5 yrs.)

PVn = PMT (PVIFA15%,5 yrs.)

PVn = $10,000 (3.352)

PVn = $15,000 (3.352)

PVn = $33,520

PVn = $50,280

NPV = PVn Initial investment

NPV = PVn Initial investment

NPV = $33,520 $30,000

NPV = $50,280 $40,000

NPV = $3,520

NPV = $10,280

Calculator solution: $3,521.55

Calculator solution: $10,282.33

(b) Project X

Project Y

$CF 3.352 = $30,000

$CF 3.352 = $40,000

$CF = $30,000 3.352

$CF = $40,000 3.352

$CF = $8,949.88

$CF = $11,933.17

(c) Project X
Probability = 60%

Project Y
Probability = 25%

(d) Project Y is more risky and has a higher potential NPV. Project X has less risk and
less return while Project Y has more risk and more return, thus the risk-return tradeoff.
(e) Choose Project X to minimize losses; to achieve higher NPV, choose Project Y.