Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment.
Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects.
The investment and cash flow patterns are as follows:
Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Project E Project H
($20,000 Investment) ($20,000 Investment)
Year: 1 $5,000 Year: 1 cash flow: $ 16,000
Year: 2 $ 6,000 Year: 2 cash flow: $ 5,000
Year: 3 $ 7,000 Year: 3 cash flow: $ 4,000
Year: 4 $ 10,000
a. Determine the net present value of the projects based on a zero percent discount rate.
b. Determine the net present value of the projects based on a 9 percent discount rate. (Do not round intermediate calculations and round your answers to 2 decimal places.)
c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 9 percent?