Question: Net Present Value-Unequal Lives
Project 1 requires an original investment of $45,600. The project will yield cash flows of $8,000 per year for six years. Project 2 has a calculated net present value of $10,200 over a four-year life. Project 1 could be sold at the end of four years for a price of $37,000.
Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below.
| Present Value of $1 at Compound Interest |
| Year |
6% |
10% |
12% |
15% |
20% |
| 1 |
0.943 |
0.909 |
0.893 |
0.870 |
0.833 |
| 2 |
0.890 |
0.826 |
0.797 |
0.756 |
0.694 |
| 3 |
0.840 |
0.751 |
0.712 |
0.658 |
0.579 |
| 4 |
0.792 |
0.683 |
0.636 |
0.572 |
0.482 |
| 5 |
0.747 |
0.621 |
0.567 |
0.497 |
0.402 |
| 6 |
0.705 |
0.564 |
0.507 |
0.432 |
0.335 |
| 7 |
0.665 |
0.513 |
0.452 |
0.376 |
0.279 |
| 8 |
0.627 |
0.467 |
0.404 |
0.327 |
0.233 |
| 9 |
0.592 |
0.424 |
0.361 |
0.284 |
0.194 |
| 10 |
0.558 |
0.386 |
0.322 |
0.247 |
0.162 |
Present Value of an Annuity of $1 at Compound Interest
| Year |
6% |
10% |
12% |
15% |
20% |
| 1 |
0.943 |
0.909 |
0.893 |
0.870 |
0.833 |
| 2 |
1.833 |
1.736 |
1.690 |
1.626 |
1.528 |
| 3 |
2.673 |
2.487 |
2.402 |
2.283 |
2.106 |
| 4 |
3.465 |
3.170 |
3.037 |
2.855 |
2.589 |
| 5 |
4.212 |
3.791 |
3.605 |
3.352 |
2.991 |
| 6 |
4.917 |
4.355 |
4.111 |
3.784 |
3.326 |
| 7 |
5.582 |
4.868 |
4.564 |
4.160 |
3.605 |
| 8 |
6.210 |
5.335 |
4.968 |
4.487 |
3.837 |
| 9 |
6.802 |
5.759 |
5.328 |
4.772 |
4.031 |
| 10 |
7.360 |
6.145 |
5.650 |
5.019 |
4.192 |
a. Determine the net present value of Project 1 over a four-year life with residual value, assuming a minimum rate of return of 6%. If required, round to the nearest dollar.