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 proposed investment, compute the following. Assume discounted at an annual rate of 10 percent. Use Exhibits 26-3 and26-4 where necessary.

(1) Payback period
(2) Return on average investment
(3) Net present value

b. Based on your computations in part a, which proposal do you consider to be the better investment?

Solutions

Expert Solution

Answer is given below with working

ekkarill92 answered 1 year ago

Next > < Previous

Related 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...

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?

Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a...

Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a ten-year life. Bill uses a 12% discount rate. Option 1 Option 2 Equipment purchase and installation $70,200 $82,120 Annual cash flow $28,600 $31,070 Equipment overhaul in year 3 $4,810 - Equipment overhaul in year 5 - $6,250 Calculate the net present value of the two opportunities. (Round present value factor calculations to 4 decimal places, e.g. 1.2514 and the final answers to 0 decimal...

Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a...

Bill Zimmerman is evaluating two new business opportunities. Each of the opportunities shown below has a ten-year life. Bill uses a 12% discount rate. Option 1 Option 2 Equipment purchase and installation $70,200 $82,120 Annual cash flow $28,600 $31,070 Equipment overhaul in year 3 $4,810 - Equipment overhaul in year 5 - $6,250 Click here to view the factor table. Calculate the net present value of the two opportunities. (Round present value factor calculations to 4 decimal places, e.g. 1.2514...

Assume that a company has two possible investment opportunities that are not correlated, called Project A...

Assume that a company has two possible investment opportunities that are not correlated, called Project A and Project B. Assume that managers of the company are rational and the company’s capital allocation is efficient. Why would the managers would want to invest in both Project A and B? Discuss two implications of diversification. Now, assume that the company invested in both projects and it turns out the initial NPV calculation for Project A was incorrect (the NPV is found to...

An investor with an investment horizon of two years has two investment opportunities: 1.The first investment...

An investor with an investment horizon of two years has two investment opportunities: 1.The first investment opportunity is to invest in two-year Treasury bond, yielding 5% per year. 2.The second opportunity is to invest in one-year Treasury bond and then after one year, to roll over an investment into another one year bond. If one year Treasury bond yields 4% and assuming that Expectation Theory holds what should one year bond yield one year from now? Explain fully and show...

Investment Decision Rules Problem 1 Coral, Inc. is evaluating investment opportunities and should decide between two...

Investment Decision Rules Problem 1 Coral, Inc. is evaluating investment opportunities and should decide between two mutually exclusive projects: B or C. Both projects require the same initial investments 18 million and generate different cash flows as follow: Project (B) generates 2.2 million in perpetuity growing at 3.0% (forever) Project (C) generate 1.6 million in perpetuity growing at 4.0% ((forever) If Coral is using the IRR to make her final decision, calculate the IRR of each of the following project....

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. If he diversifies his investment by putting 60% of his money into The Sunglasses and 40% into The Umbrella, what is the expected return and standard deviation of his portfolio? State of the Economy Probability of 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 .50 0% 25% A. The expected return for each company is 12.50% and the standard deviation for each company is 25.00%. B. The expected return for each company is 12.50% and the...

OpenSea, Inc. is evaluating investment opportunities and should decide between two mutually exclusive projects: A, or...

OpenSea, Inc. is evaluating investment opportunities and should decide between two mutually exclusive projects: A, or B. Both projects require the same initial investments 14 million and generate different cash flows as follow: -Project (A) generates 3.0 million per year in a perpetuity - Project (B) generates 1.9 million in perpetuity growing at 2.2% (forever) If OpenSea is using the IRR to make her final decision, calculate the IRR of each of the following project. Calculate the NPV of both...

Subjects