Problem 3.10 net present value. assume that your firm wants to choose between two project options: project a: $500,000 invested today will yield an expected income stream of $150,000 per year for 5 years, starting in year 1. project b: an initial investment of $400,000 is expected to produce this revenue stream: year 1 = 0, year 2 = $50,000, year 3 = $200,000, year 4 = $300,000, and year 5 = $200,000. assume that a required rate of return for your company is 10% and that inflation is expected to remain steady at 3% for the life of the project. which is the better investment? why?

Project B is a better investment

Explanation:

Given:

Project A's initial investment is $500,000

Expected cash inflow starting from year 1 for 5 years is $150,000

Required rate of return is 10% and inflation is 3%. So required rate of return is 13%

NPV of project A = -500,000 + Present value of annuity of $150,000, 5 years at 13%

Present value of annuity factor of $1, 13%, 5 periods = 3.5172

NPV of project A = -500,000 + (150,000 × 3.5172)

                           = $27,580

Poject B's initial investment =  $400,000

Use present value factor of $1, 13% to compute present value of cash inflows:

Year 1 = 0

Year 2 = 50,000 × 0.7831 = 39,155

Year 3 = 200,000 × 0.6931 = 138,620

Year 4 = 300,000 × 0.6133 = 183,990

Year 5 = 200,00 × 0.5428 = 108,560

NPV of project B = -400,000 + (39,155 + 138,620 + 183,990 + 108,560)

                           = $70,325

Since project B's NPV is higher than project A, project B is a better investment.

answer: b) the us is the leading importer but not the leading exporter.

extra info:

the u.s is the largest importer but it is not the largest exporter as china sits on the top of the table when it comes to leading exporters.

but u.s is not far from first,

they rank in 2nd globally as the worlds largest exporter.

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