A company has to choose between two projects whose cash flows are as indicated 

below;

Project 1: 

i. Investment – Rs. 15 Lakhs

ii. Annual cost savings – Rs. 4 lakhs.

iii. Bi-annual maintenance cost – Rs. 50,000/-

iv. Reconditioning and overhaul during 5th year: 6 lakhs

v. Life of the project – 8 years

vi. Salvage value – Rs. 5 lakhs

Project 2:

vii. Investment – Rs. 14 Lakhs

viii. Annual cost savings – Rs. 3.5 lakhs.

ix. Annual Maintenance cost – Rs. 20,000/-

x. Reconditioning and overhaul during 4th year: 5 lakhs

xi. Life of the project – 8 years

xii. Salvage Value- 2 lakhs

Which project should the company choose? The annual discount rate is 12

1 Answer

Answer :

Year Project 1 Project 2

Outgo Saving NPV Outgo Saving NPV

0 15.0 0 =-15.0 14.0 0 = -14

1 0 4.0 = (4 / (1+.12)1

= 3.571

0.2 3.5 = (3.3 / (1+.12)1

= 2.95

2 0.5 4.0 = (3.5 / (1+.12)2

= 2.79

0.2 3.5 = (3.3 / (1+.12)2

= 2.63

3 0 4.0 = (4 / (1+.12)3

= 2.84

0.2 3.5 = (3.3 / (1+.12)3

= 2.35

4 0.5 4.0 = (3.5 / (1+.12)4

= 2.22

5 3.5 = (-1.5 / (1+.12)4

= -0.95

5 6 4.0 = (-2 / (1+.12)5

= -1.13

0.2 3.5 = (3.3 / (1+.12)5

= 1.87

6 0.5 4.0 = (3.5 / (1+.12)6

= 1.77

0.2 3.5 = (3.3 / (1+.12)6

= 1.67

7 0 4.0 = (4 / (1+.12)7

= 1.81

0.2 3.5 = (3.3 / (1+.12)7

= 1.49

8 0.5 9 (4+5) = (8.5 / (1+.12)8

= 3.43

0.2 5.5 

(3.5+2)

= (5.3 / (1+.12)8

= 2.14

NPV = + 2.301 @12% = + 0.15

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