Question
In: Finance
Your manager has tasked you with evaluating two alternative projects for the company’s expansion: The first...
Your manager has tasked you with evaluating two alternative projects for the company’s expansion:
The first option costs $200,000 with the expected cash inflow to the firm estimated at $60,000 per year after depreciation and tax. The life of this project is 7 years.
The second option costs $350,000 and has a life span of 10 years. The cash inflow to the firm from this option is estimated to be $80,000 per annum, again after depreciation and tax.
This company has a cost of capital of 15%. Assume other similar projects will be implemented at the end of these two projects, whichever is chosen.
- Calculate, for both projects, the:
- Internal Rate of Return (IRR)
- Net Present Value
- Profitability Index (PI) and;
- Payback period for project 1 and 2.
- Can NPV be used to rank the projects? If not, what should you do? Explain fully which project should be chosen.
- Identify, describe and discuss some of the limitations associated with the use of the NPV in analysing projects?
Solutions
jeff jeffy answered 1 year agoRelated Solutions
Your manager has tasked you with evaluating two alternative projects for the company’s expansion: The first...
Your manager has tasked you with evaluating two alternative
projects for the company’s expansion:
The first option costs $200,000 with the expected cash inflow to
the firm estimated at $60,000 per year after depreciation and tax.
The life of this project is 7 years.
The second option costs $350,000 and has a life span of 10
years. The cash inflow to the firm from this option is estimated to
be $80,000 per annum, again after depreciation and tax.
This company...
Your manager has tasked you with evaluating two alternative projects for the company’s expansion: The first...
Your manager has tasked you with evaluating two alternative
projects for the company’s expansion:
The first option costs $200,000 with the expected cash inflow to
the firm estimated at $60,000 per year after depreciation and tax.
The life of this project is 7 years.
The second option costs $350,000 and has a life span of 10
years. The cash inflow to the firm from this option is estimated to
be $80,000 per annum, again after depreciation and tax.
This company...
Again, your manager has tasked you with providing a recommendation regarding two alternative projects. You have...
Again, your manager has tasked you with providing a
recommendation regarding two alternative projects. You have
identified the following two projects with the following
characteristics:
Project
A
Project B
CAPEX / Initial
Outlay
$500,000
$300,000
Project
life
5
years
6 years
Revenue (per
year)
$350,000
$250,000
Variable
costs
$90,000
$80,000
Operating
expense
$60,000
$40,000
Investment in Net Working Capital
(Year 0)
$50,000
$30,000
The company’s tax rate is 30% and uses a straight-line
depreciation method. There will...
Again, your manager has tasked you with providing a recommendation regarding two alternative projects. You have...
Again, your manager has tasked you with providing a
recommendation regarding two alternative projects. You have
identified the following two projects with the following
characteristics:
Project
A
Project B
CAPEX / Initial
Outlay
$500,000
$300,000
Project
life
5
years
6 years
Revenue (per
year)
$350,000
$250,000
Variable
costs
$90,000
$80,000
Operating
expense
$60,000
$40,000
Investment in Net Working Capital
(Year 0)
$50,000
$30,000
The company’s tax rate is 30% and uses a straight-line
depreciation method. There will...
Again, your manager has tasked you with providing a recommendation regarding two alternative projects. You have...
Again, your manager has tasked you with providing a
recommendation regarding two alternative projects. You have
identified the following two projects with the following
characteristics:
Project
A
Project B
CAPEX / Initial
Outlay
$500,000
$300,000
Project
life
5
years
6 years
Revenue (per
year)
$350,000
$250,000
Variable
costs
$90,000
$80,000
Operating
expense
$60,000
$40,000
Investment in Net Working Capital
(Year 0)
$50,000
$30,000
The company’s tax rate is 30% and uses a straight-line
depreciation method. There will...
Alternative Capital Investments The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion...
Alternative Capital Investments
The investment committee of Sentry Insurance Co. is evaluating
two projects, office expansion and upgrade to computer servers. The
projects have different useful lives, but each requires an
investment of $490,000. The estimated net cash flows from each
project are as follows:
Net Cash Flows
Year
Office Expansion
Servers
1
$125,000
$165,000
2
125,000
165,000
3
125,000
165,000
4
125,000
165,000
5
125,000
6
125,000
The committee has selected a rate of 12% for purposes of net...
Your company has tasked you with the evaluation of two projects for investments, Project X and...
Your company has tasked you with the evaluation of two projects
for investments, Project X and Project Y. Each project has a cost
of capital of R10,000 and the required return of 12 percent.
The projects’ expected cash flows (in Rands) are listed below:
Year
Project X
Project Y
0
(10,000.00)
(10,000.00)
1
6,500.00
4,000.00
2
3,000.00
4,000.00
3
3,000.00
4,000.00
4
2,000.00
4,000.00
Required:
11.1. Calculate each project’s payback period, net present value
(NPV and profitability index (PI).
11.2....
Suppose, a company considers two alternative expansion projects. The first project requires initial outlay of -$100,000;...
Suppose, a company considers two alternative expansion projects.
The first project requires initial outlay of -$100,000; and the
second one costs less: - $7,000. Subsequent incremental cash flows
from the more expensive project will be $27,000 for 5 years. The
cash flows from the second alternative will be lower: $4,000 for 3
years. Which expansion project would you recommend the company
undertakes and why? WACC is 7%.
You are evaluating two alternative financing arrangements. The first arrangement requires twenty annual payments with the...
You are evaluating two alternative financing arrangements. The
first arrangement requires twenty annual payments with the first
payment of $10,000 made in a year, while the second arrangement
requires that each payment be made a year earlier but is otherwise
similar to the first arrangement.
(a) If payments subsequent to the first increase at an annual rate
of 5%, and the financiers require a 10% return on both
arrangements, calculate how much more capital the financiers would
be willing to...
The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to...
The investment committee of Sentry Insurance Co. is evaluating
two projects, office expansion and upgrade to computer servers. The
projects have different useful lives, but each requires an
investment of $1,117,000. The estimated net cash flows from each
project are as follows:
Net Cash Flow
Year
Office Expansion
Server
1
$312,000
$412,000
2
312,000
412,000
3
312,000
412,000
4
312,000
412,000
5
312,000
6
312,000
The committee has selected a rate of 15% for purposes of net
present...
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