1 answer

(1) A firm is considering an expansion project that will last three years. The project requires...

Question:

(1) A firm is considering an expansion project that will last three years. The project requires an immediate purchase of a ne

(1) A firm is considering an expansion project that will last three years. The project requires an immediate purchase of a new equipment that costs $900,000. The equipment will be fully depreciated using straight-line method over the next three years. The resale price of the equipment at the end of year three is estimated to be $200,000. The project will generate annual sales of $750,000 and incur annual costs (all costs except depreciation expense) of $200,000 for each of the next three years. The project requires an immediate investment of $50,000 in NWC, which will be fully recovered in year 3. The corporate tax rate is 30%. Calculate the Cash Flow from Assets (Project Cash Flow) for the project for years 0, 1, 2, and 3. (2) For the project above in question (1), calculate the payback period, the discounted payback period, the net present value, and the internal rate of return. Assume that the required rate of return is 15%. Consider the following two projects A and B. Assume that the appropriate discount rate for each project is 20%. Year CF for Project A CF for Project B - $1,700 900 1 2 3 - $100 70 80 90 900 900 (3) If projects A and B are independent projects, which project(s) should you accept based on your best capital budgeting criteria? Please explain your rationale. (4) If projects A and B are mutually exclusive projects, which project(s) should you accept based on your best capital budgeting criteria? Please explain your rationale.

Answers

1). Project cash flows: Year 0 = -950,000; Year 1 = 475,000; Year 2 = 475,000; Year 3 = 665,000

2). NPV = 259,460.01; IRR = 29.94%

All calculations in the table below:

Year (n) Formula 0 2 Initial Investment (I) Annual sales (S) Annual cost (C) Depreciation (D) 900000 750000 750000 750000 20

Payback period = 2 years; discounted payback period = 2.41 years

Year (n) Formula 0 1 2 Project Cash Flow (PCF) Cumulative cash flow (CCF) Payback period (in years) 475000 475000 -950000 665

Year (n) Formula 0 1 2 Discounted PCF (DPCF) Cumulative cash flow (CCF) 950000 413043.48 -950000536956.5 359168.242 437248.29

3).

Year (n) Formula 0 1 2 Project A cash flow (CF -100 70 80 90 Project B cash flow (CFn) -1700 900 900 900 Using NPV function w

As per the NPV rule, project B should be selected but as per the IRR rule, project A should be selected. Usually, the NPV decision is taken as NPV is considered a better metric of project earnings. However, if both projects are independent then both can be selected.

4).

If the projects are mutually exclusive then only one of the two can be selected. In this case, it is better to go by the NPV rule and select project B.

.

Similar Solved Questions

1 answer
Respon A scientist wishes to measure the concentration of methyl benzoate in a plant stream by...
Respon A scientist wishes to measure the concentration of methyl benzoate in a plant stream by gas chromatography. He prepares a sample of butyl benzoate to use as an internal standard. The results of a preliminary run, which used a solution known to contain 1.71 mg/ml, of methyl benzoate (peak A) a...
1 answer
16pts. Use the Disk Method to find the volume of the solid of revolution bounded by...
16pts. Use the Disk Method to find the volume of the solid of revolution bounded by the graphs of y=x+1 1. und 2, and rotated about the x-axis. 87 16 pts] 4. Use the Washer Method to find the volume of a solid of revolution formed by revolving the region bounded above by the graph of y = 2x and belo...
1 answer
3. (11) if you add 0.075 moles of acetic acid (K1.8 X 10'), and 4.15 g...
3. (11) if you add 0.075 moles of acetic acid (K1.8 X 10'), and 4.15 g of NaA (MM-83 /mol) to a single flask, and then add and enough water to so that the total volume in the flask is 400.0 ml, what would be the pH of the solution?...
2 answers
Means-testing in income redistribution programs can create perverse incentives. This means that the structure of the...
Means-testing in income redistribution programs can create perverse incentives. This means that the structure of the program: A. makes income distribution worse rather than better. B. reduces income mobility, particularly between generations. C. induces people to do things that are inefficient. D. i...
1 answer
Question 4 View Policies Current Attempt in Progress Whispering Winds Company uses the periodic inventory method...
Question 4 View Policies Current Attempt in Progress Whispering Winds Company uses the periodic inventory method and had the following inventory Information available Units 1/1 118 Beginning Inventory Purchase Unit Cost $4 $5 Total Cost $472 2,950 590 1/20 7/25 10/20 Purchase 118 826 Purchase 354 1,...
1 answer
On May 1, 2017, Ivanhoe Company issued 2,600 $1,000 bonds at 102. Each bond was issued...
On May 1, 2017, Ivanhoe Company issued 2,600 $1,000 bonds at 102. Each bond was issued with one detachable wock warrant. Shortly after Issuance, the bonds were seling at 99, but the fair value of the warrants cannot be determined () Prepare the entry to record the issuance of the bonds and warrants ...
1 answer
Java help!im a littleconfused with this swap. Could someone please explain the steps. possibly with a...
java help!im a littleconfused with this swap. Could someone please explain the steps. possibly with a memory diagram? thanks!! public class tricky {       public static void tricky1(Point arg1, Point arg2) {     arg1.x = 100;     arg1.y = 100;  ...
1 answer
Business Statistics
A factory manager collected a sample of ten (10) packets of 3 -in-1 coffee and the weights (in grams) of each packet are recorded as follow.\(\begin{array}{lllll}25 & 23 & 26 & 28 & 24 \\ 21 & 26 & 24 & 25 & 27\end{array}\)Calculate(a) the mean weight of a packet of 3...
1 answer
On extracting a trial balance, the accountant of Extra Consult discovered a suspense account with a...
On extracting a trial balance, the accountant of Extra Consult discovered a suspense account with a debit balance of $1,075 included therein; she also found that the debits exceeded the credits by $957. She posted this difference to the suspense account and then investigated the situation. She disco...
1 answer
To understand the chemical basis of inheritance, we must understand the molecular structure of DNA Explain...
To understand the chemical basis of inheritance, we must understand the molecular structure of DNA Explain why this is an example of reductionism in the study of biology?...
1 answer
We are working with rref matrices. what are the possible solutions to these matrices? 7. Describe...
We are working with rref matrices. what are the possible solutions to these matrices? 7. Describe all solutions to: [ 2 -2 [ 4 0 1 1 101 -9 21 | T = [2010] 14 i 21] [3] ſo 3 2 0 0] 3 3 2 2 ·ī=...
1 answer
A-D pleasees 02:44:25 Submit Quiz Quiz: Final Exam Time This Quiz: 50 pts possible 14 of...
A-D pleasees 02:44:25 Submit Quiz Quiz: Final Exam Time This Quiz: 50 pts possible 14 of 21 (17 complete) This Question: 3 pts The data set below contains spending on products (S) during a three-month period by a sample of 15 customers receiving incentives through a mobile loyaity Complete parts...
1 answer
A retail outlet for calculators sells 700 calculators per year. It costs $2 to store one...
A retail outlet for calculators sells 700 calculators per year. It costs $2 to store one calculator for a year. To reorder, there is a fixed cost of $7, plus $1.25 for each calculator. How many times per year should the store order calculators, and in what lot size, in order to minimize inventory co...
1 answer
Discuss ways you would disseminate research-based evidence; how would you share with your peers? Include your...
Discuss ways you would disseminate research-based evidence; how would you share with your peers? Include your thoughts on why it is important for you to be involved in communicating and applying nursing research evidence....
1 answer
Please help ! 1,2 diols form carbonyl compounds via the Pinacol Rearrangement. Provide a stepwise mechanism, Detail...
Please help ! 1,2 diols form carbonyl compounds via the Pinacol Rearrangement. Provide a stepwise mechanism, Details count; include all nonbonding electrons and formal charges!...