Business – 10.3 Investment appraisal – Concept of investment appraisal | e-Consult
10.3 Investment appraisal – Concept of investment appraisal (1 questions)
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NPV calculation (discount factor = 1/(1+0.10)^t):
- Project X
| Year | Cash flow (£k) | Discount factor | Present value (£k) |
| 0 | -120 | 1.000 | -120.00 |
| 1 | 40 | 0.909 | 36.36 |
| 2 | 45 | 0.826 | 37.17 |
| 3 | 50 | 0.751 | 37.55 |
| 4 | 55 | 0.683 | 37.57 |
| Total NPV | 28.65 |
- Project Y
| Year | Cash flow (£k) | Discount factor | Present value (£k) |
| 0 | -120 | 1.000 | -120.00 |
| 1 | 50 | 0.909 | 45.45 |
| 2 | 45 | 0.826 | 37.17 |
| 3 | 40 | 0.751 | 30.04 |
| 4 | 35 | 0.683 | 23.91 |
| Total NPV | 16.57 |
Both projects have a positive NPV, indicating they add value. However, Project X has the higher NPV (£28.65k vs £16.57k). Because the projects are mutually exclusive, ABC Ltd should select Project X as it maximises shareholder wealth.