Prestwood Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows: Project A's NPV is
Prestwood Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows: Project A's NPV is
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
Related questions
Question
Prestwood Products Company's cost of capital is 11.2% and the company is considering two mutually exclusive projects. In the past, it usually takes about 5 years for the company to recoup its investments from a good project. The projects' expected cash flows are as follows:
Project A's NPV is
Transcribed Image Text:The table presents projected cash flows for Project A and Project B over an eight-year period, with each column representing a different aspect of the project evaluation:
- **Year**: This column indicates the year from 0 to 7.
- **Project A**: This column shows the cash flows in dollars for Project A for each respective year:
- Year 0: $(300)
- Year 1: $(387)
- Year 2: $(193)
- Year 3: $100
- Year 4: $600
- Year 5: $600
- Year 6: $650
- Year 7: $50
- **Project B**: This column displays the cash flows in dollars for Project B for each respective year:
- Year 0: $(405)
- Year 1: $134
- Year 2: $134
- Year 3: $234
- Year 4: $134
- Year 5: $134
- Year 6: $134
- Year 7: $0
In the table, negative values (in parentheses) indicate an initial investment or outflow of cash, while positive values represent incoming cash flows for subsequent years. The table compares how each project performs over the specified period, highlighting differences in cash flow patterns between Project A and Project B.
Expert Solution
Step 1
The net present value is the difference between the present value of cash inflows and the present value of cash outflows. If the net present value of the project is positive, then such a project should be accepted. In case of negative net present value, the project should be rejected.
Step by step
Solved in 3 steps with 2 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education