Question
In: Accounting
The Riverside Company is evaluating two mutually exclusive projects: Black and White, at the end of...
The Riverside Company is evaluating two mutually exclusive projects: Black and White, at the end of 2016. The firm’s weighted average cost of capital is 8%. Data for each project are as follows:
| Black | White | |||
Cost of investment—end 2016 |
25,000 |
Cost of investment—end 2016 |
$43,000 |
|
|
Cash inflow—2017 |
8,000 |
Cash inflow—2017 |
20,000 |
|
|
Cash inflow—2018 |
8,000 |
Cash inflow—2018 |
30,000 |
|
|
Cash inflow—2019 |
8,000 |
Cash inflow—2019 |
10,000 |
|
|
Cash inflow—2020 |
8,000 |
Cash inflow—2020 |
0 |
|
|
Cash inflow—2021 |
8,000 |
Cash inflow—2021 |
0 |
|
Time value of money tables for an 8% discount rate are:
| Present Value of 1 | Present Value of an Annuity | |||
n |
Table Factor |
n |
Table Factor |
|
|
1 |
.92593 |
1 |
.92593 |
|
|
2 |
.85734 |
2 |
1.78326 |
|
|
3 |
.79383 |
3 |
2.57710 |
|
|
4 |
.73503 |
4 |
3.31213 |
|
|
5 |
.68058 |
5 |
3.99271 |
|
Requirements:
Compute the net present value for each project using the time value of money tables presented in the problem.
Determine which project the Riverside Company should invest in based on NPV.
Compute the profitability index for each project.
Determine which project the Riverside Company should invest in based on the profitability index.
Should the firm invest in the Black or White project? What is the basis for your choice?
Solutions
ekkarill92 answered 1 year agoRelated Solutions
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