EX2-4 (Algo) You work for the 3T company, which...

You work for the 31 company, which expects to earn at least 13 percent on its lovestments. You have to choose between two similar projects. Below is the cash flow information for each project.

Calculate the NPV of each project. (Use the NPV function in Excel to solve this problem.)

Which of the two projects would you fund if the decision is based only on financial information and you could only choose one of the projects?

Year

Inflow

Outflow Netflow (208,000)

Alpha Year

Inflow

200,000

0

Y

0120,000

(120,000)

Y1

0

Outflow t 218,000

(218,000)

170,000

(170,000 150,000

Y2

150,000

Y2

150,000

0

Y

220.000

30,000 150,000

Y3

30,000

190,000 194,000

164,000

164,000 YA

194,000

205,000

47,000 150,000 197,000

YS

205,000 197,000

37,000

150,000 197,000

197,000

76

0

30,000

70,000

Y7

100,000 30,000 485,000

70,000 581,000

Total 1,016,000

415,000

601,000 Total 1,066,000

The NPV for Omega is

The NPV for Alpha is

The better project is

To calculate the **Net Present Value (NPV)** for each project, we will use the following formula for NPV:

\[
\text{NPV} = \sum \left( \frac{\text{Net Cash Flow}_t}{(1 + r)^t} \right) - \text{Initial Investment}
\]

Where:
- $ t $ is the year (starting from 0),
- $ r $ is the discount rate (in this case, the expected return of 13%, or 0.13),
- $\text{Net Cash Flow}_t$ is the net cash flow at year $t$.

The given projects are **Alpha** and **Omega** with respective cash flows.

### Project Alpha:
- **Year 0**: Initial investment of $-208,000$
- **Year 1**: Cash flow = $ 0 $
- **Year 2**: Cash flow = $ 150,000 $
- **Year 3**: Cash flow = $ 194,000 $
- **Year 4**: Cash flow = $ 205,000 $
- **Year 5**: Cash flow = $ 76,000 $

### Project Omega:
- **Year 0**: Initial investment of $-218,000$
- **Year 1**: Cash flow = $ 170,000 $
- **Year 2**: Cash flow = $ 150,000 $
- **Year 3**: Cash flow = $ 164,000 $
- **Year 4**: Cash flow = $ 197,000 $
- **Year 5**: Cash flow = $ 37,000 $

### NPV Calculation:
I will now calculate the NPVs for both Alpha and Omega.The NPVs for the two projects are as follows:
- **NPV of Project Alpha**: \$210,903.83
- **NPV of Project Omega**: \$304,480.61

### Conclusion:
Based on financial information alone, **Project Omega** has a higher NPV and would be the better choice to fund.

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Would you like to explore more details or have any questions on this? 

Here are 5 follow-up questions for deeper understanding:
1. How does the discount rate impact the NPV results?
2. What would happen if the discount rate was higher or lower than 13%?
3. Could a higher initial investment for Project Omega still make it the better option?
4. What are some non-financial factors to consider when choosing between projects?
5. How does the concept of Internal Rate of Return (IRR) compare to NPV in decision-making?

**Tip:** Always compare NPV when projects are mutually exclusive to ensure the most financially beneficial choice.

You work for the 31 company, which expects to earn at least 13 percent on its investments. You have to choose between two similar projects. Below is the cash flow information for each project. Calculate the NPV of each project. (Use the NPV function in Excel to solve this problem.) Which of the two projects would you fund if the decision is based only on financial information and you could only choose one of the projects?

Compare the Net Present Value (NPV) of two projects, Alpha and Omega, using a 13% discount rate. Learn how to calculate NPV with Excel and make informed financial decisions. This example is perfect for students and professionals in finance or business studies.

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