Provide an evaluation of the three proposed projects whose cash flow forecasts were found below: Product A Product B Product C Initial cost $760,000 $650,000 $512,000 Expected life 5 years 5 years 4 years Scrap Value expected $30,000 $35,000 $20,000 Expected cash inflows $ $ $ Year 1 320,000 200,000 200,000 2 300,000 240,000 210,000 3 240,000 210,000 180,000 4 320,000 260,000 160,000 5 180,000 180,000 Since these projects involve additions to Caledonia’s highly successful Avalon product line, the company requires a rate of return on each project equal to 24 percent. The company relies on a number of criteria when evaluating new investment opportunities. The projects are independent. Michael was not surprised by the memo, for he had been expecting something like this for some time. Caledonia followed a practice of testing each of their new financial analyst with some type of project evaluation exercise after they have been on the job for a few months. After re-reading the memo Michael decided on his plan of action and made up the following “to do” list: Calculate for each project: The payback period for each project The Net Present Value (NPV) The Profitablility Index (PI) Which project should be accepted and why? Prepare Michael’s Assignment for his Wednesday meeting with the CFO by filling out your response to the “to do” list above. PVIF 24% 1 0.8065 2 0.6504 3 0.5245 4 0.4230 5 0.3411
Provide an evaluation of the three proposed projects whose cash flow
|
Product A |
Product B |
Product C |
||
|
Initial cost |
$760,000 |
$650,000 |
$512,000 |
|
|
Expected life |
5 years |
5 years |
4 years |
|
|
Scrap Value expected |
$30,000 |
$35,000 |
$20,000 |
|
|
Expected |
$ |
$ |
$ |
|
|
Year |
||||
|
1 |
320,000 |
200,000 |
200,000 |
|
|
2 |
300,000 |
240,000 |
210,000 |
|
|
3 |
240,000 |
210,000 |
180,000 |
|
|
4 |
320,000 |
260,000 |
160,000 |
|
|
5 |
180,000 |
180,000 |
Since these projects involve additions to Caledonia’s highly successful Avalon product line, the company requires a
Michael was not surprised by the memo, for he had been expecting something like this for some time. Caledonia followed a practice of testing each of their new financial analyst with some type of project evaluation exercise after they have been on the job for a few months. After re-reading the memo Michael decided on his plan of action and made up the following “to do” list:
Calculate for each project:
- The payback period for each project
- The
Net Present Value (NPV) - The Profitablility Index (PI)
- Which project should be accepted and why?
Prepare Michael’s Assignment for his Wednesday meeting with the CFO by filling out your response to the “to do” list above.
PVIF 24%
1 0.8065
2 0.6504
3 0.5245
4 0.4230
5 0.3411
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