The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm’s weighted average cost of capital is 8%. Data for each project are as follows: Black White Cost of investment—end 2020 25,000 Cost of investment—end 2020 $43,000 Cash inflow—2021 8,000 Cash inflow—2021 20,000 Cash inflow—2022 8,000 Cash inflow—2022 30,000 Cash inflow—2023 8,000 Cash inflow—2023 10,000 Cash inflow—2024 8,000 Cash inflow—2024 0 Cash inflow—2025 8,000 Cash inflow—2025 0 Requirements: Compute the net present value for each asset using Excel's NPV function. 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?
The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm’s weighted average cost of capital is 8%. Data for each project are as follows: Black White Cost of investment—end 2020 25,000 Cost of investment—end 2020 $43,000 Cash inflow—2021 8,000 Cash inflow—2021 20,000 Cash inflow—2022 8,000 Cash inflow—2022 30,000 Cash inflow—2023 8,000 Cash inflow—2023 10,000 Cash inflow—2024 8,000 Cash inflow—2024 0 Cash inflow—2025 8,000 Cash inflow—2025 0 Requirements: Compute the net present value for each asset using Excel's NPV function. 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?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Problem 4–1
The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm’s weighted average cost of capital is 8%. Data for each project are as follows:
| Black | White | |||
Cost of investment—end 2020 |
25,000 |
|
Cost of investment—end 2020 |
$43,000 |
|
|
8,000 |
|
Cash inflow—2021 |
20,000 |
|
Cash inflow—2022 |
8,000 |
|
Cash inflow—2022 |
30,000 |
|
Cash inflow—2023 |
8,000 |
|
Cash inflow—2023 |
10,000 |
|
Cash inflow—2024 |
8,000 |
|
Cash inflow—2024 |
0 |
|
Cash inflow—2025 |
8,000 |
|
Cash inflow—2025 |
0 |
Requirements:
- Compute the
net present value for each asset using Excel's NPV function. - 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?
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