Net present value.

Lepton Industries has four potential projects, all with an initial cost of
$1,500,000. The capital budget for the year will allow Lepton to accept only one of the
four projects. Given the discount rates and the future cash flows of each project,
determine which project Lepton should accept.

ANSWER
Find the NPV of each project and compare the NPVs.
Project Q’s NPV = -$1,500,000 + $350,000/1.04 + $350,000/1.042 + $350,000/1.043 +
$350,000/1.044 + $350,000/1.045
Project Q’s NPV = -$1,500,000 + $336,538.46 + $323,594.67 + $311,148.73 + $299,181.47
+ $287,674.49
Project Q’s NPV = $58,137.84
Project R’s NPV = -$1,500,000 + $400,000/1.08 + $400,000/1.082 + $400,000/1.083 +
$400,000/1.084 + $400,000/1.085
Project R’s NPV = -$2,000,000 + $370,370.37 + $342,935.53 + $317,532.90 + $294,011.94
+ $272,233.28
Project R’s NPV = $97,084.02
Project S’s NPV = -$1,500,000 + $700,000/1.13 + $600,000/1.132 + $500,000/1.133 +
$400,000/1.134 + $300,000/1.135
Project S’s NPV = -$1,500,000 + $619,469.03 + $469,888.01 + $346,525.08 + $245,327.49 +
$162,827.98
Project S’s NPV = $344,037.59
Project T’s NPV = -$1,500,000 + $200,000/1.18 + $400,000/1.182 + $600,000/1.183 +
$800,000/1.184 + $1,000,000/1.185
Project T’s NPV = -$1,500,000 + $169,491.53 + $287,273.77 + $365,178.52 + $412,631.10
+ $437,109.22
Project T’s NPV = $171,684.14
And the ranking order based on NPVs is,
Project S – NPV of $344,037.59
Project T – NPV of $171,684.14
Project R – NPV of $97,084.02
Project Q – NPV of $58,137.84
Campbell Industries should pick Project S.