Question

In: Finance

Digg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($)...

Digg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($) (including depreciation) are following:

Project A                              Project B

Year 0    -6000 -17500

Year 1    2000                                       5600

Year 2    2000                                       5600

Year 3    2000                                       5600

Year 4    2000                                       5600

Year 5    2000                                       5600

Year 6    4000                                       9000

If company’s WACC is 13%, find NPV, IRR, Payback and discount payback for each project. If the projects are mutually exclusive what is your recommendation to the company.


Solutions

Expert Solution

If the projects are mutually exclusive, the Project B is recommended since it has higher NPV of $6,519.36 despite contradicting results in IRR and dicounted paback periods method. NPV helps in calcualting the returns in the absolute terms which eases the managerial decision making.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Digg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($)...
Digg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($) (including depreciation) are following: Project A                              Project B Year 0    -6000 -17500 Year 1    2000                                       5600 Year 2    2000                                       5600 Year 3    2000                                       5600 Year 4    2000                                       5600 Year 5    2000                                       5600 Year 6    4000                                       9000 If company’s WACC is 13%, find NPV, IRR, Payback and discount payback for each project. If the projects are mutually exclusive what is your recommendation to the company....
Bigg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($)...
Bigg company is evaluation two projects for next year’s capital budgeting. The after-tax cash flow ($) (including depreciation) are following: Project A                              Project B Year 0    -7500 -17500 Year 1    2000                                       5600 Year 2    2000                                       5600 Year 3    2000                                       5600 Year 4    2000                                       5600 Year 5    2000                                       5600 Year 6    4000                                       9000 If company’s WACC is 13%, find NPV, IRR, Payback and discount payback for each project. If the projects are mutually exclusive what is your recommendation to the company.(show...
Coriander with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash...
Coriander with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation are as follows: Year Project A Project B O -$6000 -$18,000 1 $2000 $5,600 2 $2000 $5,600 3 $2000 $5,600 4 $2000 $5,600 5 $2000 $5,600 a. Calculate NPV and IRR for each project b. Assuming the projects are independent which one (s) would you recommend? c. If the projects are mutually exclusive, which would you recommend?
A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax...
A firm with a 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: PROJECT A: year 0 = -$6000 | year 1 = $2000 | year 3 = $2000 | year 4 = $2000 | year 5 = $2000 PROJECT B: Year 0 = -$18,000 | Year 1 = $5600 | Year 2 = $5600 | year 3 = $5600 | year 4 = $5600 | year 5 = $5600...
Capital budgeting and cash flow analysis
Th e Taylor Mountain Uranium Company currently has annual cash revenues of $1.2 millionand annual cash expenses of $700,000. Depreciation amounts to $200,000 per year.Th ese fi gures are expected to remain constant for the foreseeable future (at least 15 years).Th e fi rm’s marginal tax rate is 40 percent.A new high-speed processing unit costing $1.2 million is being considered as a potentialinvestment designed to increase the fi rm’s output capacity. Th is new piece of equipmentwill have an estimated...
The cash flow in respect of two projects is given below. The cost of capital is...
The cash flow in respect of two projects is given below. The cost of capital is 8.5%. Year Project A Project B 0 (200) (300) 1 65 100 2 65 100 3 65 90 4 60 70 5 60 70 Answer the following question using the above information. I           What is the NPV of Project A? Should this project be accepted? II         What is the NPV of Project B? Should this project be accepted? (Please state based on what the...
a) What is the Before Tax Cash Flow? b) What is the After Tax Cash Flow?...
a) What is the Before Tax Cash Flow? b) What is the After Tax Cash Flow? Given: Annual Debt Service                            $20,876             Vacancy & Collection Loss 5%             Depreciation                                       11,000             PGI                                                      46,200             Interest                                               1,700             Operating Expenses                            18,400             Marginal Tax Rate                              28%                         All numbers are annual If possible, please use a financial calculator and show me how to solve as I need to learn this concept for this class.
Explain the project evaluation project in relation to capital budgeting and the purpose of investment projects....
Explain the project evaluation project in relation to capital budgeting and the purpose of investment projects. Purposes were categorized into 6 categories: replacement, renewal, expansion, cost-reduction, conforming, and all other projects.
Evaluating a capital budgeting project that costs $40,000 that is expected to generate after-tax cash flows...
Evaluating a capital budgeting project that costs $40,000 that is expected to generate after-tax cash flows of $15,000 per year for three years. If the required rate of return is 10 percent calculate the project’s (a) NPV and (b) IRR. Should the project be purchased? This is for a review Please show steps and rationale for project purchase.
3.         The cash flow in respect of two projects is given below. The cost of capital...
3.         The cash flow in respect of two projects is given below. The cost of capital is 8.5%. Year Project A Project B 0 (200) (300) 1 65 100 2 65 100 3 65 90 4 60 70 5 60 70 Answer the following question using the above information. I           What is the NPV of Project A? Should this project be accepted? II         What is the NPV of Project B? Should this project be accepted? III        What is the Accounting...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT