Question
In: Finance
A company has two investment opportunities: Alternative A returns $36,000 now, $20,000 in two years and...
A company has two investment opportunities:
Alternative A returns $36,000 now, $20,000 in two years and $8,000 in four years.
Alternative B returns $1,470 at the end of every month for four years.
The required rate of return is 8.5% compounded semi-annually. Using the discounted cash flow (DCF) method, which alternative is preferable?
Solutions
Expert Solution
Please refer to below spreadsheet for calculation and answer. Cell reference also provided.
Cell reference -
Alternative B is preferable because its present value is higher than alternative A.
jeff jeffy answered 2 years agoRelated Solutions
Welsh Industries is evaluating two alternative investment opportunities. The controller of the company has prepared the...
Welsh Industries is evaluating two alternative investment
opportunities. The controller of the company has prepared the
following analysis of the two investment proposals.
Proposal A
Proposal B
Required investment in
equipment
$
400,000
$
576,000
Estimated service life of
equipment
5 years
6 years
Estimated salvage value
$
80,000
$
0
Estimated annual cost savings
(net cash flow)
100,000
192,000
Depreciation on equipment
(straight-line basis)
64,000
96,000
Estimated increase in annual net
income
36,000
57,600
Required:
a. For each...
Welsh Industries is evaluating two alternative investment opportunities. The controller of the company has prepared the...
Welsh Industries is evaluating two alternative investment
opportunities. The controller of the company has prepared the
following analysis of the two investment proposals.
Proposal A
Proposal B
Required investment in equipment
$
400,000
$
576,000
Estimated service life of equipment
5 years
6 years
Estimated salvage value
$
80,000
$
0
Estimated annual cost savings (net cash flow)
100,000
153,600
Depreciation on equipment (straight-line basis)
64,000
96,000
Estimated increase in annual net income
36,000
57,600
Required:
a. For each...
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Now, assume that the company invested in both projects and it
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Richard has two investment opportunities. He can invest in The Sunglasses Company or The Umbrella Company....
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the State Expected Return Sunglasses Company Expected Return
Umbrella Company Sunny 0.50 25% 0% Rainy 0.50 0% 25%
A. The expected return for the portfolio is 25.00% and...
Richard has two investment opportunities. He can invest in The Sunglasses Company or The Umbrella Company....
Richard has two investment opportunities. He can invest in The
Sunglasses Company or The Umbrella Company. What is the expected
return and standard deviation of each company?
State of the Economy
Probability of the State
Expected Return Sunglasses Company
Expected Return
Umbrella Company
Sunny
.50
25%
0%
Rainy
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0%
25%
A.
The expected return for each company is 12.50% and the standard
deviation for each company is 25.00%.
B.
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Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1...
Arnold Vimka is a venture capitalist facing two alternative
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start-up firm. He is nervous, however, about future economic
volatility. He asks you to analyze the following financial data for
the past year’s operations of the two firms he is considering and
give him some business advice.
Company Name
Larson
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Variable cost per unit (a)
$
21.00
$
10.50
Sales revenue (8,900 units × $30.00)
$
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Variable...
Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $1...
Arnold Vimka is a venture capitalist facing two alternative
investment opportunities. He intends to invest $1 million in a
start-up firm. He is nervous, however, about future economic
volatility. He asks you to analyze the following financial data for
the past year’s operations of the two firms he is considering and
give him some business advice.
Company Name
Larson
Benson
Variable cost per unit (a)
$
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$
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Sales revenue (9,000 units × $31.00)
$
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$
279,000
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