Garcìa Company can invest in one of two alternative projects. Project Y requires a $400,000 initial investment for new machinery with a four-year life and no salvage value. Project Z requires a $420,000 initial investment for new machinery with a three-year life and no salvage value. The two projects yield the following annual results. Cash flows occur evenly within each year. (PV of $1, FV of $1, PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Annual Amounts Project Y Project Z Sales of new product $ 420,000 $ 520,000 Expenses Materials, labor, and overhead (except depreciation) 194,000 204,000 Depreciation—Machinery 100,000 140,000 Selling, general, and administrative expenses 54,000 54,000 Income $ 72,000 $ 122,000 Required: Compute each project’s annual net cash flows. Compute each project’s payback period. If the company bases investment decisions solely on payback period, which project will it choose? Compute each project’s accounting rate of return. If the company bases investment decisions solely on accounting rate of return, which project will it choose? Compute each project’s net present value using 6% as the discount rate. If the company bases investment decisions solely on net present value, which project will it choose?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 4P

See similar textbooks

Related questions

Question

Garcìa Company can invest in one of two alternative projects. Project Y requires a $400,000 initial investment for new machinery with a four-year life and no salvage value. Project Z requires a $420,000 initial investment for new machinery with a three-year life and no salvage value. The two projects yield the following annual results. Cash flows occur evenly within each year. (PV of $1, FV of $1, PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Annual Amounts Project Y Project Z Sales of new product $ 420,000 $ 520,000 Expenses Materials, labor, and overhead (except depreciation) 194,000 204,000 Depreciation—Machinery 100,000 140,000 Selling, general, and administrative expenses 54,000 54,000 Income $ 72,000 $ 122,000 Required: Compute each project’s annual net cash flows. Compute each project’s payback period. If the company bases investment decisions solely on payback period, which project will it choose? Compute each project’s accounting rate of return. If the company bases investment decisions solely on accounting rate of return, which project will it choose? Compute each project’s net present value using 6% as the discount rate. If the company bases investment decisions solely on net present value, which project will it choose?

Expert Solution