Kenny, Inc. has identified the following two mutually exclusive projects.Project A-$25,00020,0005,0003,00010,000Considering 10% required return for both projects.YearProject B-$28,0007,000341,000-2,00030,000a. Calculate the NPV for each project, which one is more profitable? Why?b. If the payback cut-off is four years, which project should be accepted? Why?c. If the Internal Rate of Return (IRR) of projects A and B are 10% and 12% respectfully,which project would you choose? Why?d. Considering 10% required return, and applying profitability index criteria whichinvestment would you choose? Why?e. After applying the last four investment criteria, which project should be chosen forinvestment and why?

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Answered: Kenny, Inc. has identified the…

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 2CMA: Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of...

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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?
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
Kenny, Inc. has identified the following two mutually exclusive projects. Project A -$25,000 20,000 5,000 3,000 10,000 Considering 10% required return for both projects. Project B -S28,000 7,000 1,000 -2,000 Year 2 3 4 30,000 a. Calculate the NPV for each project, which one is more profitable? Why? b. If the payback cut-offis four years, which project should be accepted? Why? c. If the Internal Rate of Return (IRR) of projects A and B are 10% and 12% respectfully, which project would you choose? Why? d. Considering 10% required return, and applying profitability index criteria which investment would you choose? Why? e. After applying the last four investment criteria, which project should be chosen for investment and why?
1. Kenny, Inc. has identified the following two mutually exclusive projects. Project A -$25,000 20,000 5,000 3,000 10,000 Considering 10% required return for both projects. Project B -$28,000 7,000 1,000 -2,000 30,000 Year 2 3 a. Calculate the NPV for each project, which one is more profitable? Why? b. If the payback cut-offis four years, which project should be accepted? Why? c. If the Internal Rate of Return (IRR) of projects A and B are 10% and 12% respectfully, which project would you choose? Why? d. Considering 10% required return, and applying profitability index criteria which investment would you choose? Why? e. After applying the last four investment criteria, which project should be chosen for investment and why? 2. The Rolston Co. is growing quickly. Dividends are expected to grow at the 20% rate for the next three years, with the growth rate falling off to a constant 10% thereafter. If the company just paid a $3 dividend and the required return is 12%, what is the current…
The Whenworth Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) -$87,000 36,900 47,000 27,000 -$55,000 11,700 34,500 28,500 1 3 a-1. If the required return is 10 percent, what is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) a-2. If the company applies the profitability index decision rule, which project should it take? b-1. If the required return is 10 percent, what is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2. If the company applies the net present value decision rule, which project should it take? a-1. Project I Project II а-2. b-1. Project I Project II b-2.
The Michner Corporation is trying to choose between the following two mutually exclusive design projects: S Year Cash Flow (I) Cash Flow (II) 0 -$ 84,000 -$ 42,000 1 33,900 12,600 2 3 31,500 25,500 44,000 50,000 a-1. If the required return is 17 percent, what is the profitability index for each project? Note: Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161. a-2. If the company applies the profitability index decision rule, which project should it take? b-1. If the required return is 17 percent, what is the NPV for each project? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b-2. If the company applies the net present value decision rule, which project should it take? a-1. Project I a-2. Project II b-1. Project I Project II b-2. Project II Project I
1. Calculating Payback Period and NPV Greystone, Inc., has the following mutually exclusive projects. Year Project A Project B -$30,600 $21,400 10,600 15,400 15,600 6,200 8,600 3. 9,600 a. Suppose the company's payback period cutoff is two years. Which of these two projects should be chosen? b. Suppose the company uses the NPV rule to rank these.two projects. Which project should be chosen if the appropriate discount rate is 15 percent?
Calculating Payback Period and NPV Novell, Inc., has the following mutually exclusive projects. Year Project A Project B 0 -$15,000 -$19,000 1 10,400 12,700 2 5,900 6, 100 3 2,100 5, 300 Suppose the company’s payback period cutoff is two years. Which of these two projects should be chosen? Suppose the company uses the NPV rule to rank these two projects. Which project should be chosen if the appropriate discount rate is 15 percent?
The Michner Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 -$ 76,000 -$ 34,000 1 29,000 11,000 23,500 17,500 2 3 36,000 42,000 a-1. If the required return is 12 percent, what is the profitability index for each project? Note: Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161. a-2. If the company applies the profitability index decision rule, which project should it take? b-1. If the required return is 12 percent, what is the NPV for each project? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b-2. If the company applies the net present value decision rule, which project should it take? a-1. Project I a-2. Project II b-1. Project I b-2. Project II
The Michner Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) 0 -$ 82,000 1 37,600 2 37,600 37,600 Cash Flow (II) -$ 21,700 11, 200 11,200 11, 200 a-1. If the required return is 10 percent, what is the profitability index for each project? Note: Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161. a-2. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept? b-1. If the required return is 10 percent, what is the NPV for each project? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b-2. If the company applies the NPV decision rule, which project should it take? a-1. Project I Project II a-2. Project acceptance b-1. Project I Project II b-2. Project acceptance

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