A Firm Is Considering Two Alternative Projects

Essay

A firm is considering two alternative projects. Project A requires an initial expenditure of $100,000 plus an expenditure of $10,000 at the end of each of the next five years. It will yield $98,000 in revenue at the end of the first year and at the end of the fifth year. Project B requires an initial expenditure of $50,000. It will yield $15,000 in net revenue at the end of each of the next five years. Both projects have a life of five years with no salvage value or disposal cost. The table below provides present value factors for the firm's discount rate of 12 percent. Calculate the net present value and profitability index of each project. Which project is preferred by each criterion?
$$\begin{array}{l}\begin{array} { l l l } \text {Period }&\text { Present value of } \$ 1 & \text { Present value of an annuity of } \$ 1\\1 & 0.8929 & 0.8929 \\2 & 0.7972 & 1.6901 \\3 & 0.7118 & 2.4018 \\4 & 0.6355 & 3.0373 \\5 & 0.5674 & 3.6048\end{array}\end{array}$$