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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 1 year ago
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