(a) Evaluate the projects using each of the following criteria, stating which project(s) DEVCON Industries should choose under each criteria and why: i. Payback ii. Discounted Payback iii. Net Present Value iv. Profitability Index (b) Compute the Internal Rate of Return (IRR) for the Project A only, given that it falls between 15% and 18%.
(a) Evaluate the projects using each of the following criteria, stating which project(s) DEVCON Industries should choose under each criteria and why: i. Payback ii. Discounted Payback iii. Net Present Value iv. Profitability Index (b) Compute the Internal Rate of Return (IRR) for the Project A only, given that it falls between 15% and 18%.
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:DEVCON INDUSTRIES LIMITED
Income Statement
For the years ended Dec. 31, 2018 and
2019
2018
2019
s000's
so00's
Sales
900000
1125000
Cost of Goods Sold
300000
306600
Gross Profit
600000
818400
Selling and Administrative Expenses
150000
156000
Depreciation Expense
54000
57000
Advertising Expenses
18000
21000
Earnings Before Interest and Taxes
Interest Expense
378000
584400
3000
3000
Taxable Income
375000
581400
Taxation (35%)
131250
203490
Net Income
243750
377910
Dividends (40%)
97500
151164
Addition to Retained Earnings
146250
226746
Additional Information
Share Price
21
27.3
Ordinary Shares Outstanding
120000000
144000000
DEVCON INDUSTRIES
LIMITED
Statement of Financial
Position
As at Dec. 31, 2018 and 2019
2019
s000's
ASSETS
2018
LIABILITIES & EQUITY
2018
2019
Current Assets
so00's
Current Liabilities
so00's
s000's
Inventories
264000
276000
Accounts Payables
Notes Payables
138000
114000
Accounts Receivables
294000
330000
150900
132654
Cash and Equivalents
210900
270000
288900
246654
768900
876000
Non-current Liabilities
120000
90000
Total Liabilities
408900
336654
Net Fixed Assets
630600
690000
Equity
Common Stock
264000
276000
Retained Earnings
726600
953346
Total Equity
990600
1229346
Total Assets
1399500
1566000
Total Liabilities & Equity
1399500
1566000
Transcribed Image Text:Based on the Weighted Average Cost of Capital calculated in question
4, DEVCON Industries decides, based on the risk profile of projects
A and B, to use a required return of 15%.
You have been tasked with evaluating the quantitative aspects of the
projects, which are mutually exclusive. The projected cash flows of
both projects are as follows:
Project
Years
-2250000
-3750000
1
500000
1000000
750000
2000000
3
800000
2000000
4
1400000
2000000
As noted above, the company has a required rate of return of 15%. The
following PV factors are provided:
PV
Year
Factor
(15%)
1
0.8696
2
0.7561
3
0.6575
4
0.5718
Required:
(a) Evaluate the projects using each of the following criteria, stating
which project(s) DEVCON Industries should choose under each
criteria and why:
i. Payback
ii. Discounted Payback
i. Net Present Value
iv. Profitability Index
(b) Compute the Internal Rate of Return (IRR) for the Project A
only, given that it falls between 15% and 18%.
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