Projects A and B have first costs of $5,000 and $9,000 respectively. • Project A has net annual benefits of $2,500 during each year of its 5-year useful life, after which it can be replaced identically. • Project B has net annual benefits of $3,300 during each year of its 10-year life. Use present worth analysis, an interest rate of 30% per year, and a 10-year analysis period to determine which project to select. Project A Project B

Projects A and B have first costs of $5,000 and $9,000 respectively. • Project A has net annual benefits of $2,500 during each year of its 5-year useful life, after which it can be replaced identically. • Project B has net annual benefits of $3,300 during each year of its 10-year life. Use present worth analysis, an interest rate of 30% per year, and a 10-year analysis period to determine which project to select. Project A Project B

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 1P

See similar textbooks

Similar questions

Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
In an unrelated analysis, you have the opportunity to choose between the following two mutually exclusive projects, Project T (which lasts for 2 years) and Project F (which lasts for 4 years): The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 10% cost of capital. (1) What is each projects initial NPV without replication? (2) What is each projects equivalent annual annuity? (3) Apply the replacement chain approach to determine the projects extended NPVs. Which project should be chosen? (4) Assume that the cost to replicate Project T in 2 years will increase to 105,000 due to inflation. How should the analysis be handled now, and which project should be chosen?
Perform a financial analysis for a project. Assume that the projected costs and benefits for this project are spread over 6 years as follows. Estimated costs are $1,100,000 in Year 0, and $50,000 each year in Years 1, 2, 3, 4, 5 and 6. Estimated benefits are $0 in Year 0, and $450,000 each year in Years 1, 2, 3, 4, 5 and 6. Use a 15% discount rate. Suppose the required payback period and discounted payback period are both 3 years. (1) Calculate the payback period (based on the original cash flows without discounting), and evaluate the project based on the payback method. (2) Calculate the discounted payback period (based on discounted cash flows), and evaluate the project based on the discounted payback method. (3) Evaluate the project using the NPV method, and explain whether you would recommend investing in this project.
Use the following information for problems 4, 5, 6, and 7 A project initially costs $40,000 and has a 10 year lifetime. The project returns benefits of S10,000 at the end of the first year, increasing by 12% in each of the following years. Costs are incurred at a rate of S4,000 per year. The anticipated salvage value is S7,000. MARR = 15%. 4. The benefit/cost ratio is closest to ... a) 1.24 b) 1.27 c) 1.30 O 1.33 e) 1.37 ) 1.41 g) 1.43 h) 1.45 5. The simple payback period is closest to ... D4.7 years b) 3.5 years c) 8.1 years d) 4.9 years e) 4.5 years f) 4.1 years g) 8.4 years h) 5.7 years i) a payback period does not occur
The maintenance cost for an investment is $2000 per year for the first 10 years and $1000 per year, for the 10 years past the initial maintenance period. The salvage value of the investment is $15,000. Draw the cash flow and calculate the present value of costs and benefits if the rate of return is 5%.
A project with an initial outlay of $400 has an economic life of 5 years. The project after-tax cash flows are $150 in Years 1 & 2, then after-tax cash flows of $100 in Years 3 through 5. Calculate the internal rate of return, net present value and profitability index using an interest rate of 12%.
Perform a financial analysis for a project. Assume that the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $300,000 in Year 1 and $ 75,000 each year in Years 2, 3, and 4. Estimated benefits are $0 in Year 1 and $110,000 each year in Years 2, 3, and 4. Use a 6 percent discount rate, and round the discount factors to two decimal places. What is the Return on Investment (ROI)? (Keep your answer in two decimal places. e.g. 46.59. Do not enter % symbol.)
A new IS project is to be developed with an initial cost of1.5million and a maintenance cost of 100,000 annually (excluding the first year). It is expected that this project will generate 600,000 annually, starting from the first year. a. Show the payback projection for the project in the first five years. b. Calculate the net present value (NPV) in five years for the project using a discount rate of20%. c. Calculate the internal rate of return (IRR) if the target is to break even in 3 years.
An Investment project provides the cash flow inflows of $615 per year for 8 years. a) What is the project payback period if the initial cost is $1,750? X years. b) What is the project payback period if the initial cost is $3,400? X years. c) WHat is the project payback period if the initial cost is $5,100 X years.
A project has an initial cost of $100,000, and cash inflows of $40,000, $30,000, $20,000, $15,000, $10,000, and $10,000 at the end of each of the next 6 years. What is the approximate discounted payback period for this project if the required rate of return is 8%? a. 5 years and 1 month b. 5 years and 3 months c. 5 years and 5 months d. 5 years and 7 months e. 5 years and 9 months