Problem 5: Platypus Corporation's managers have presented the company's management with two proposals for expanding its production capacity. Based on the following two different alternatives, which proposal should they adopt? Cost of the Equipment Required Project 1 $250,000 Working Capital Investment Required 0 Annual Cash Inflows $65,000 Maintenance cost in year 4 $15,000 Maintenance cost in year 6 0 Salvage Value of Equipment in 8 Years $12,000 Project 2 $100,000 $150,000 $50,000 0 $15,000 0 Both projects have a life of 8 years. In 8 years Project 2's working capital will be released and be available to invest in other projects. The company has a discount rate of 16% Required: 1) Calculate the net present value for each project. 2) Based solely on the net present value of the project, which alternative would you recommend the company invest in? Why?
Problem 5: Platypus Corporation's managers have presented the company's management with two proposals for expanding its production capacity. Based on the following two different alternatives, which proposal should they adopt? Cost of the Equipment Required Project 1 $250,000 Working Capital Investment Required 0 Annual Cash Inflows $65,000 Maintenance cost in year 4 $15,000 Maintenance cost in year 6 0 Salvage Value of Equipment in 8 Years $12,000 Project 2 $100,000 $150,000 $50,000 0 $15,000 0 Both projects have a life of 8 years. In 8 years Project 2's working capital will be released and be available to invest in other projects. The company has a discount rate of 16% Required: 1) Calculate the net present value for each project. 2) Based solely on the net present value of the project, which alternative would you recommend the company invest in? Why?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 5:
Platypus Corporation's managers have presented the company's management with two proposals
for expanding its production capacity. Based on the following two different alternatives, which
proposal should they adopt?
Cost of the Equipment Required
Project 1
$250,000
Working Capital Investment Required
0
Annual Cash Inflows
$65,000
Maintenance cost in year 4
$15,000
Maintenance cost in year 6
0
Salvage Value of Equipment in 8 Years
$12,000
Project 2
$100,000
$150,000
$50,000
0
$15,000
0
Both projects have a life of 8 years. In 8 years Project 2's working capital will be released and be
available to invest in other projects. The company has a discount rate of 16%
Required:
1) Calculate the net present value for each project.
2) Based solely on the net present value of the project, which alternative would you
recommend the company invest in? Why?
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