1. Suppose you have recently joined Kakoli Furniture, Inc., and your manager has asked you to help him evaluate the following mutually exclusive projects. The company's board of directors has set a maximum 4- year payback requirement and has set its cost of capital at 10%. The cash inflows associated with the three projects are shown in the following table. CASH FLOWS A YEAR B (100,000) $35,000 $55,000 $45,000 $25,000 $15,000 (120,000) $25,000 $30,000 $50,000 $60,000 $70,000 (90,000) $15,000 $20,000 $50,000 $60,000 $50,000 1 4 Calculate NPV, Profitability Index and Pay back of these projects. b) Your calculation indicates that project A's initial investment would be recovered quicker than any other projects, therefore you believe A is the best alternative. However, your boss is strongly against investing in A. The top management also supports your boss. Identify and explain some of the factors which might have led your boss and the top management to think otherwise.
1. Suppose you have recently joined Kakoli Furniture, Inc., and your manager has asked you to help him evaluate the following mutually exclusive projects. The company's board of directors has set a maximum 4- year payback requirement and has set its cost of capital at 10%. The cash inflows associated with the three projects are shown in the following table. CASH FLOWS A YEAR B (100,000) $35,000 $55,000 $45,000 $25,000 $15,000 (120,000) $25,000 $30,000 $50,000 $60,000 $70,000 (90,000) $15,000 $20,000 $50,000 $60,000 $50,000 1 4 Calculate NPV, Profitability Index and Pay back of these projects. b) Your calculation indicates that project A's initial investment would be recovered quicker than any other projects, therefore you believe A is the best alternative. However, your boss is strongly against investing in A. The top management also supports your boss. Identify and explain some of the factors which might have led your boss and the top management to think otherwise.
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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Transcribed Image Text:1. Suppose you have recently joined Kakoli Furniture, Inc., and your manager has asked you to help him
evaluate the following mutually exclusive projects. The company's board of directors has set a maximum 4-
year payback requirement and has set its cost of capital at 10%. The cash inflows associated with the three
projects are shown in the following table.
CASH FLOWS
A
(100,000)
$35,000
$55,000
$45,000
$25,000
$15,000
YEAR
B
(120,000)
$25,000
S30,000
$50,000
S60,000
$70,000
C
(90,000)
$15,000
$20,000
$50,000
$60,000
$50,000
1
3
4
a) Calculate NPV, Profitability Index and Pay back of these projects.
b) Your calculation indicates that project A's initial investment would be recovered quicker than any
other projects, therefore you believe A is the best alternative. However, your boss is strongly against
investing in A. The top management also supports your boss. Identify and explain some of the factors
which might have led your boss and the top management to think otherwise.
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