Step 1: For each project, calculate Discounted Cash Flow (DCF) for each year from Y0 upto Y7. DCF is discounted at extected rate of return of 18%. Formula for calculating DCF is: DCFt = NCFt/(1+r)t, where DCFt and NCFt indicate Discounted Cash Flow and Net Cash Flow in year t, and r is the expected rate of return.
Step 2: For each project, calculate Net Present Value by adding the DCF of all the years from year 0 upto 7
Calculation in Excel and the formula are given below:
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Formula:
E3 =D3/1.18^A3 copy to E3:E10
L3 =K3/1.18^H3 copy to L3:L10
E11 =SUM(E3:E10)
L11 =SUM(L3:L10)
NPV of project Omega = $ 119,689
NPV of project Alpha = $ 176,525
NPV of project Alpha is higher. Therefore, project Alpha provides higher profit in terms of NPV.
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