COST-BENEFIT ANALYSIS Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alternative. Round the cost projections to the nearest month. b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why? PROBLEM 7: CosT-BENEFIT AMALYSIS COST OF CAPITAL = .14 Probability Amount Probability Amount Project completion time 0.5 0.3 0.2 12 months 18 months 24 months 4 years 5 years 6 years $200,000 250,000 300,000 $ 75,000 95,000 105,000 0.6 12 months 0.2 18 months 0.1 24 months 4 years 5 years 6 years $210,000 250,000 260,000 $ 85,000 100,000 110,000 Expected useful ife 0.6 0.5 0.25 0.3 0.2 0.15 0.35 One-time costs 0.2 0.4 0.55 0.25 0.25 Recurring costs 0.1 0.4 0.55 0.35 0.4 0.2 Annual tangible benefits starting with weighted average completion date 0.3 0.5 0.2 $220,000 233,000 240,000 0.25 0.5 0.25 $215,000 225,000 235,000
COST-BENEFIT ANALYSIS Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alternative. Round the cost projections to the nearest month. b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why? PROBLEM 7: CosT-BENEFIT AMALYSIS COST OF CAPITAL = .14 Probability Amount Probability Amount Project completion time 0.5 0.3 0.2 12 months 18 months 24 months 4 years 5 years 6 years $200,000 250,000 300,000 $ 75,000 95,000 105,000 0.6 12 months 0.2 18 months 0.1 24 months 4 years 5 years 6 years $210,000 250,000 260,000 $ 85,000 100,000 110,000 Expected useful ife 0.6 0.5 0.25 0.3 0.2 0.15 0.35 One-time costs 0.2 0.4 0.55 0.25 0.25 Recurring costs 0.1 0.4 0.55 0.35 0.4 0.2 Annual tangible benefits starting with weighted average completion date 0.3 0.5 0.2 $220,000 233,000 240,000 0.25 0.5 0.25 $215,000 225,000 235,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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*COST-BENEFIT ANALYSIS
Listed in the diagram are some probability estimates of the costs and benefits associated with two competing projects.
a. Compute the
b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why?
Transcribed Image Text:DAYBACK
PROBLEM 15: COST-BENEFIT ANALYSIS
%3D
Cost of Capital = .14
B
Amount
Probability
Amount
Probability
12 months
0.6
12 months
0.5
Project completion time
0.2
18 months
18 months
0.3
24 months
0.1
24 months
0.2
0.6
4 years
0.5
4
4 years
Expected useful life
5 years
0.25
5 years
0.3
0.15
6 years
0.2
6.
6 years
$200,000
0.2
$210,000
0.35
One-fime costs
0.4
250,000
0.55
250,000
0.25
300,000
0.25
260,000
0.1
$75,000
0.4
$85,000
Recurring costs
0.55
95,000
0.4
100,000
0.35
105,000
0.2
110,000
Annual tangible benefits starting with
weighted average completion date
0.3
$220,000
0.25
$215,000
0.5
233,000
0.5
225,000
0.2
240,000
0.25
235,000
Transcribed Image Text:COST-BENEFIT ANALYSIS
Listed in the diagram for Problem 7 are some probability
estimates of the costs and benefits associated with two
competing projects.
a. Compute the net present value of each
alternative. Round the cost projections to the
nearest month.
b. Repeat step (a) for the payback method.
c. Which method do you think provides the best
source of information? Why?
PROBLEM 7: Cosr-BENEFIT ANALYSIS
COST OF CAPITAL = .14
Probability
Amount Probability
Amount
0.5
0.3
0.2
0.6
12 months
18 months
24 months
4 years
5 years
6 years
$210,000
250,000
260,000
$ 85,000
100,000
110,000
Project completion time
12 months
18 months
0.2
24 months
4 years
5 years
6 years
$200,000
250,000
300,000
$ 75,000
95,000
105,000
0.1
Expected useful ife
0.6
0.5
0.25
0.15
0.35
0.3
0.2
0.2
0.55
0.25
0.4
0.4
0.2
One-time costs
04
0.25
Recurring costs
0.1
0.55
0.35
Annual tangible benefits starting with
weighted average completion date
0.3
0.5
0.2
$220,000
233,000
240,000
0.25
0.5
0.25
$215,000
225,000
235,000
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