Consider the following data for two Investments (assume MARR-minimum acceptable annual rate of return on original investment of 20% after taxes and ignore land value, startup costs) Annual Investment Total initial no fixed capital investment Working Capital investment Salvage value at Service Life (yrs) cash end of expenses (Rs) (Rs) service life (Rs) before tax (constant for each yr) (Rs) 1 100,000 20,000 10,000 4 A 2 150,000 30,000 20,000 6 B For Investment no. 1, annual revenue before tax is constant every year and is Rs. 80,000. Also, annual cash flow (ACF) after taxes for yr 1= Rs. 50,000, for other years is not known. For Investment no. 2, annual revenue (after tax) is: yr 1= Rs. 110,000, yr 2= Rs. 120,000, yr 3= Rs. 130,000, yr 4= Rs. 140,000, yr 5= Rs. 150,000, yr 6= Rs. 170,000. For Investment no. 2, annual cash flow (ACF) after taxes for yr 1= Rs. 55,000, for other years is not known. Assume annual depreciation to be evaluated by sum of years digits method and for time value of money considerations, end of year costs to be used. Also income tax rate= 20% yearly. A) Determine the values of 'A', 'B', in above table (upto 2 decimals) B) Based on Net Present Worth method, which investment should be preferred? Provide clear mathematical justification with explanation. Please answer With Step-by-step And Explanation
Consider the following data for two Investments (assume MARR-minimum acceptable annual rate of return on original investment of 20% after taxes and ignore land value, startup costs) Annual Investment Total initial no fixed capital investment Working Capital investment Salvage value at Service Life (yrs) cash end of expenses (Rs) (Rs) service life (Rs) before tax (constant for each yr) (Rs) 1 100,000 20,000 10,000 4 A 2 150,000 30,000 20,000 6 B For Investment no. 1, annual revenue before tax is constant every year and is Rs. 80,000. Also, annual cash flow (ACF) after taxes for yr 1= Rs. 50,000, for other years is not known. For Investment no. 2, annual revenue (after tax) is: yr 1= Rs. 110,000, yr 2= Rs. 120,000, yr 3= Rs. 130,000, yr 4= Rs. 140,000, yr 5= Rs. 150,000, yr 6= Rs. 170,000. For Investment no. 2, annual cash flow (ACF) after taxes for yr 1= Rs. 55,000, for other years is not known. Assume annual depreciation to be evaluated by sum of years digits method and for time value of money considerations, end of year costs to be used. Also income tax rate= 20% yearly. A) Determine the values of 'A', 'B', in above table (upto 2 decimals) B) Based on Net Present Worth method, which investment should be preferred? Provide clear mathematical justification with explanation. Please answer With Step-by-step And Explanation
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:Consider the following data for two Investments (assume MARR-minimum acceptable annual
rate of return on original investment of 20% after taxes and ignore land value, startup costs)
Annual
Investment
Total initial
no
fixed capital
investment
Working
Capital
investment
Salvage
value at
Service
Life (yrs)
cash
end of
expenses
(Rs)
(Rs)
service life
(Rs)
before tax
(constant
for each yr)
(Rs)
1
100,000
20,000
10,000
4
A
2
150,000
30,000
20,000
6
B
For Investment no. 1, annual revenue before tax is constant every year and is Rs. 80,000.
Also, annual cash flow (ACF) after taxes for yr 1= Rs. 50,000, for other years is not known.
For Investment no. 2, annual revenue (after tax) is: yr 1= Rs. 110,000, yr 2= Rs. 120,000,
yr 3= Rs. 130,000, yr 4= Rs. 140,000, yr 5= Rs. 150,000, yr 6= Rs. 170,000. For Investment
no. 2, annual cash flow (ACF) after taxes for yr 1= Rs. 55,000, for other years is not known.
Assume annual depreciation to be evaluated by sum of years digits method and for time value
of money considerations, end of year costs to be used. Also income tax rate= 20% yearly.
A) Determine the values of 'A', 'B', in above table (upto 2 decimals)
B) Based on Net Present Worth method, which investment should be preferred?
Provide clear mathematical justification with explanation.
Please answer With Step-by-step And Explanation
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