The CFO of Advo Corporation is considering two investment opportunities. The expected future cash...

Question

The CFO of Advo Corporation is considering two investment opportunities. The expected future cash inflows for each opportunity follow.







Year 1


Year 2


Year 3


Year 4




Project 1


$144,000


$147,000


$160,000


$178,000




Project 2


204,000


199,000


114,000


112,000




Both investments require an initial payment of $400,000. Advo’s desired rate of return is 16 percent.
Required
a. Compute the net present value of each project. Which project should Advo adopt based on the net present value approach?
b. Based on the payback approach (incremental revenue summation method) which project should Advo adopt?

Robert · Accepted Answer

Calculation of net present value 
 
PV at 16% Project 1 Present Value  Project 2 Present value 
Cash Inflow 1 (4,00,000) (4,00,000.00) (4,00,000) (4,00,000.00 ) 
Year 1 0.8621 1,44,000 1,24,137.93 2,04,000 1,75,862.07 
Year 2 0.7432 1,47,000 1,09,244.95 1,99,000 1,47,889.42 
Year 3 0.6407 1,60,000 1,02,505.23 1,14,000 73,034.97 
Year 4 0.5523 1,78,000 98,

The CFO of Advo Corporation is considering two investment opportunities. The expected future cash inflows for each opportunity follow. Year 1 Year 2 Year 3 Year 4 Project 1 $144,000 $147,000 $160,000...

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	Year 1	Year 2	Year 3	Year 4
Project 1	$144,000	$147,000	$160,000	$178,000
Project 2	204,000	199,000	114,000	112,000