Question

In: Finance

Chandler Tire Co. is trying to decide which one of two projects it should accept. Both...

Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why?

Project 1, because the annual cash flows are greater by $4,000 than those of Project 2

Project 2, because the total cash inflows are $72,000 greater than those of Project 1

Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

It does not matter as both projects have almost identical present values.

Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62

Solutions

Expert Solution

Solution :

The present value of the cash inflows of Project 1 = $ 196,793.10

The present value of the cash inflows of Project 2 = $ 215,391.43

The company should select project 2 because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

= $ 215,391.43 - $ 196,793.10 = $ 18,598.33

Please find the attached screenshot of the excel sheet containing the detailed calculation for the above solution.

jeff jeffy answered 10 months ago
Next > < Previous

Related Solutions

Your company is trying to decide which one of two projects it should accept. Both projects...
Your company is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52 000 at the end of each year for six years. Project 2 will produce cash flows of $39 000 at the beginning of each year for eight years. The company requires a 15% return. Required: a. Whichprojectshouldthecompanyselectandwhy? b. Whichprojectshouldthecompanyselectiftheinterestrateis12%atthe cash flows in Project 2 is also at the end of...
Avril Skatergirl is trying to decide which recording contract she should accept and wishes it wasn’t...
Avril Skatergirl is trying to decide which recording contract she should accept and wishes it wasn’t so complicated that she can’t keep her head above water amidst all the numbers. Getting it right could be worth more than just a nickel back. Her opportunity cost is 5% p.a. I’m With You Productions Inc. offers a payment of $2 million now on her next album plus 50% royalty on gross sales of $5 million for two years, with the royalties paid...
Avril Skatergirl is trying to decide which recording contract she should accept and wishes it wasn’t...
Avril Skatergirl is trying to decide which recording contract she should accept and wishes it wasn’t so complicated that she can’t keep her head above water amidst all the numbers.  Getting it right could be worth more than just a nickel back. Her opportunity cost is 5% p.a. I’m With You Productions Inc. offers a payment of $2 million now on her next album plus 50% royalty on gross sales of $5 million for two years, with the royalties paid at...
Avril Skater girl is trying to decide which recording contract she should accept and wishes it...
Avril Skater girl is trying to decide which recording contract she should accept and wishes it wasn’t so complicated that she can’t keep her head above water amidst all the numbers. Getting it right could be worth more than just a nickel back. Her opportunity cost is 5% p.a. I’m With You Productions Inc. offers a payment of $2 million now on her next album plus 50% royalty on gross sales of $5 million for two years, with the royalties...
A supermarket is trying to decide whether to accept or reject a shipment of tomatoes. It...
A supermarket is trying to decide whether to accept or reject a shipment of tomatoes. It is impossible to check all the tomatoes for size, but they desire an average weight of 8 ounces (they neither want too large nor too small). (a) State the hypotheses. (b) A random sample of 25 tomatoes yields an average weight of 7.65 ounces and a standard deviation of 1.15 ounces. Calculate the test statistic and the p-value. (c) Would you reject H0, or...
Jami and Fred are two neighbors and they are trying to decide if they should put...
Jami and Fred are two neighbors and they are trying to decide if they should put a hedge between their two yards to increase their privacy. The cost of the hedge would be $1,000. Jami values the hedge at $800 and Fred values the hedge at $600. If there is no hedge the status quo remains and they each have net benefits of zero. The plan would be for each neighbor to contribute half of the cost for the hedge....
Jami and Fred are two neighbors and they are trying to decide if they should put...
Jami and Fred are two neighbors and they are trying to decide if they should put a hedge between their two yards to increase their privacy. The cost of the hedge would be $1,000. Jami values the hedge at $800 and Fred values the hedge at $600. If there is no hedge the status quo remains and they each have net benefits of zero. The plan would be for each neighbor to contribute half of the cost for the hedge....
Which one of the following is true if the managers of a firm accept only projects...
Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5? Group of answer choices The internal rate of return on each new project is zero. The net present value of each new project is zero. The price of the firm's stock should remain constant. The firm is most likely steadily losing value. The firm should increase in value each time it accepts a new project.
You are trying to decide whether to accept or reject a project. The project will generate...
You are trying to decide whether to accept or reject a project. The project will generate a cash flow of $15,000 in year one; $25,000 in year two; $20,000 in year three; and $4,000 in year four. The project costs $40,000 initially. The firm has a weighted average cost of capital of 8%. Your firm generally accepts projects that payback in three years or less. What is the discounted payback of the project? Should you accept or reject the project?
A financial analyst needs to evaluate two independent investments and decide which projects should be purchased....
A financial analyst needs to evaluate two independent investments and decide which projects should be purchased. Project A costs $150,000 and has an IRR of 12 percent, and Project B costs $140,000 and has an IRR of 10 percent. The capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are rdt 5 4%, rs 5 10%, and re 5 12.5%. If the company expects to generate $230,000 in retained earnings this...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT