b) Based on these figures, Project Detroit should be pursued as it has the superior NPV. Even though both projects yield the same absolute amount of net cash flow (each totalling $550,000), Project Colorado does not observe most of its returns until the final two years, i.e. when the money has lost much of its value. In addition, the payback period for Detroit is shorter (just 2 years). The ARR is the similar for both projects (since DCF are not considered in the calculation of ARR). Other quantitative factors may also necessitate to be considered, e.g. management preferences.
|
Year
|
Investment Colorado
|
Investment Detroit
|
|
Net Cash Flow ($)
|
Discount Factor
|
Present Value ($)
|
Net Cash Flow ($)
|
Discount Factor
|
Present Value ($)
|
|
0
|
(300,000)
|
1.00
|
(300,000)
|
300,000
|
1.00
|
(300,000)
|
|
1
|
50,000
|
0.9524
|
47,620
|
100,000
|
0.9524
|
95,240
|
|
2
|
100,000
|
0.9070
|
90,700
|
200,000
|
0.9070
|
181,400
|
|
3
|
200,000
|
0.8638
|
172,760
|
200,000
|
0.8638
|
172,760
|
|
4
|
200,000
|
0.8227
|
164,540
|
50,000
|
0.8227
|
41,135
|
|
NPV
|
|
175,620
|
|
190,535
|