Problem 11.9: You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler AG, Ford, Toyota and other automakers. Your boss, the chief financial officer (CFO), has just handed you an assignment that includes the estimated cash flows for two proposed projects. The project's are related to the firm's ignition system line, but you are unsure if the projects are independent or mutually exclusive so ranking the two projects would be helpful. Allied requires a rate of return on projects like this of 14 percent and a maximum payback period of 4 years. The cash flows for the two projects are provided below and to prepare your analysis you have decided to do the following: 1. Calculate the payback period, NPV and IRR for both projects. 2. If you assume the two projects are independent - that is, that both could be accepted if both are acceptable, evaluate the two projects' acceptability using all three decision criteria from #1 above. 3. Rank the two projects and make a recommendation as to which (if either) should be accepted under the assumption that the projects are mutually exclusive. Year 0 1 23455 6 Project A Project B -$750,000.00-$635,000.00 $100,000.00 $125,000.00 $150,000.00 $200,000.00 $150,000.00 $225,000.00 $175,000.00 $200,000.00 $200,000.00 $150,000.00 $250,000.00 $150,000.00 7 8 Discount Rate Payback (years) 1 Payback NPV $200,000.00 $150,000.00 $175,000.00 $100,000.00 RR 2 Independent Projects Payback NPV IRR 3. Mutually Exclusive Projects Rank
Problem 11.9: You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler AG, Ford, Toyota and other automakers. Your boss, the chief financial officer (CFO), has just handed you an assignment that includes the estimated cash flows for two proposed projects. The project's are related to the firm's ignition system line, but you are unsure if the projects are independent or mutually exclusive so ranking the two projects would be helpful. Allied requires a rate of return on projects like this of 14 percent and a maximum payback period of 4 years. The cash flows for the two projects are provided below and to prepare your analysis you have decided to do the following: 1. Calculate the payback period, NPV and IRR for both projects. 2. If you assume the two projects are independent - that is, that both could be accepted if both are acceptable, evaluate the two projects' acceptability using all three decision criteria from #1 above. 3. Rank the two projects and make a recommendation as to which (if either) should be accepted under the assumption that the projects are mutually exclusive. Year 0 1 23455 6 Project A Project B -$750,000.00-$635,000.00 $100,000.00 $125,000.00 $150,000.00 $200,000.00 $150,000.00 $225,000.00 $175,000.00 $200,000.00 $200,000.00 $150,000.00 $250,000.00 $150,000.00 7 8 Discount Rate Payback (years) 1 Payback NPV $200,000.00 $150,000.00 $175,000.00 $100,000.00 RR 2 Independent Projects Payback NPV IRR 3. Mutually Exclusive Projects Rank
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
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Transcribed Image Text:Problem 11.9: You recently went to work for Allied Components Company, a
supplier of auto repair parts used in the after-market with products from Daimler AG,
Ford, Toyota and other automakers. Your boss, the chief financial officer (CFO), has
just handed you an assignment that includes the estimated cash flows for two
proposed projects. The project's are related to the firm's ignition system line, but
you are unsure if the projects are independent or mutually exclusive so ranking the
two projects would be helpful. Allied requires a rate of return on projects like this of
14 percent and a maximum payback period of 4 years. The cash flows for the two
projects are provided below and to prepare your analysis you have decided to do the
following:
1. Calculate the payback period, NPV and IRR for both projects.
2. If you assume the two projects are independent - that is, that both could be
accepted if both are acceptable, evaluate the two projects' acceptability using all
three decision criteria from #1 above.
3. Rank the two projects and make a recommendation as to which (if either) should
be accepted under the assumption that the projects are mutually exclusive.
Year
0
Project A Project B
-$750,000.00 -$635,000.00
8
123456700
$100,000.00 $125,000.00
$150,000.00 $200,000.00
$150,000.00 $225,000.00
$175,000.00 $200,000.00
$200,000.00 $150,000.00
$250,000.00 $150,000.00
$200,000.00 $150,000.00
$175,000.00 $100,000.00
Discount Rate
Payback (years)
1.
Payback
NPV
IRR
2. Independent Projects
Payback
NPV
IRR
3. Mutually Exclusive Projects
Rank
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