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Option 1 Option 2 Initial investment 13,000,000 18,000,000 Life of project Required of return 6 years 12% 8 years 10% Sales are expected to be 550,000; costs 395,000; yearly cash flow 2,100,000; depreciation cost per year 700,000. There is no increase in sales or prices in the first three years. Beginning from the fourth year, revenues and cost of sales will grow by 25%, 20% in the fifth year, 15% in the sixth year, and remain constant at 10% for the remaining years There are two recommended options. Meanwhile, our financial manager has analysed the investment by performing two discounted methods and one non-discounted cash flow method based on the information in the attached table. Nevertheless, we are still in a dilemma choosing between the options. We would be grateful if you could provide us with some advice regarding this matter. Q1: Identify which option needs to be chosen and state the reason why the company chose the option.

Option 1 Option 2 Initial investment 13,000,000 18,000,000 Life of project Required of return 6 years 12% 8 years 10% Sales are expected to be 550,000; costs 395,000; yearly cash flow 2,100,000; depreciation cost per year 700,000. There is no increase in sales or prices in the first three years. Beginning from the fourth year, revenues and cost of sales will grow by 25%, 20% in the fifth year, 15% in the sixth year, and remain constant at 10% for the remaining years There are two recommended options. Meanwhile, our financial manager has analysed the investment by performing two discounted methods and one non-discounted cash flow method based on the information in the attached table. Nevertheless, we are still in a dilemma choosing between the options. We would be grateful if you could provide us with some advice regarding this matter. Q1: Identify which option needs to be chosen and state the reason why the company chose the option.

Essentials Of Investments
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
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Option 1 Option 2 Initial investment 13,000,000 18,000,000 Life of project Required of return 6 years 12% 8 years 10% Sales are expected to be 550,000; costs 395,000; yearly cash flow 2,100,000; depreciation cost per year 700,000. There is no increase in sales or prices in the first three years. Beginning from the fourth year, revenues and cost of sales will grow by 25%, 20% in the fifth year, 15% in the sixth year, and remain constant at 10% for the remaining years There are two recommended options. Meanwhile, our financial manager has analysed the investment by performing two discounted methods and one non-discounted cash flow method based on the information in the attached table. Nevertheless, we are still in a dilemma choosing between the options. We would be grateful if you could provide us with some advice regarding this matter. Q1: Identify which option needs to be chosen and state the reason why the company chose the option.
Transcribed Image Text:Option 1 Option 2 Initial investment 13,000,000 18,000,000 Life of project Required of return 6 years 12% 8 years 10% Sales are expected to be 550,000; costs 395,000; yearly cash flow 2,100,000; depreciation cost per year 700,000. There is no increase in sales or prices in the first three years. Beginning from the fourth year, revenues and cost of sales will grow by 25%, 20% in the fifth year, 15% in the sixth year, and remain constant at 10% for the remaining years There are two recommended options. Meanwhile, our financial manager has analysed the investment by performing two discounted methods and one non-discounted cash flow method based on the information in the attached table. Nevertheless, we are still in a dilemma choosing between the options. We would be grateful if you could provide us with some advice regarding this matter. Q1: Identify which option needs to be chosen and state the reason why the company chose the option.
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