King Racing Company (KRC) is considering which of two mutually exclusive engine development projects to pursue. King's RPX design has an expected life of 4 years and projected cash inflows are $3.6 million at the end of each of the first two years and $1.8 million in each of the next two years. King's RPB design is more flexible and has an eight-year life. The projected end-of-year flows from the RPB design are $2.4 million in each of the first two years and $2.0 million in each of the next six years. Both projects require an initial investment of $5.4 million, and King's cost of capital is 12 percent. Frequent changes in racing rules and engine technology make engine development risky, but King feels that the basic designs can be refined and modified. Thus, King often assumes that continuous replacements can be made as a project's life ends. What is the net present value (on an eight-year extended basis) of the project with the most value to the company?
King Racing Company (KRC) is considering which of two mutually exclusive
engine development projects to pursue. King's RPX design has an expected
life of 4 years and projected
each of the first two years and $1.8 million in each of the next two
years. King's RPB design is more flexible and has an eight-year life.
The projected end-of-year flows from the RPB design are $2.4 million in
each of the first two years and $2.0 million in each of the next six
years. Both projects require an initial investment of $5.4 million, and
King's cost of capital is 12 percent. Frequent changes in racing rules
and engine technology make engine development risky, but King feels that
the basic designs can be refined and modified. Thus, King often assumes
that continuous replacements can be made as a project's life ends.
What is the
project with the most value to the company?
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