The cash flows of two projects have been presented to Copper Limited ("Copper"), which havethe different risk profiles compared to Copper existing operations:Year01Project Black Project White(500,000)(220,000)1,360,00070,000(900,000)140,000080,00023During a recent Board meeting, the following statements were presented:'Since depreciation is a non-cash item, the useful life chosen will not have an impact on thecash flows of a project. Instead, interest cost is a cash out flow and should be included whencomputing a project's cash flows. And if the tax rate increases, NPV of a project will definitelydecline.if you are the finance manager of Copper, how would you assess these two projects,given the knowledge learned fromEssentials of Financial Management?Critique the above statement presented during the Board meeting. Where appropriate,state your assumptions.

Assumptions:- The cash flows provided are the incremental after-tax cash flows attributable to each…

Answered: The cash flows of two projects have…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 3MAD

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Do the following practice questions (for practice not for grading). By doing them correctly, you can demonstrate your understanding of how abandonment and expansion options are incorporated in project valuation. 1. The Newsome Corporation is considering the purchase of a new technology to help expand its current sales of axel-rods. The cost of the technology installed is $118,000,000 million. The company estimates that the present value as of the end of year one of all its cash flows (including the CF1) is $234,000,000 if the project is successful and $64,500,000 if it's not. The company assigns a 40% chance to success. The RRR or the cost of capital applicable to the project is 13%. a. Given the above information and based on static analysis, should the company go ahead with its investment? Answer: No because NPV - $0.92 million =- b. Upon further study the company realizes that, if the project was not successful, it can stop production and sell the equipment for an after-tax salvage…
Garage, Inc., has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$43,500 -$43,500 1 21,400 6,400 2 18,500 14,700 3 13,800 22,800 4 7,600 25,200 What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct? If the required return is 11 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule? Over what range of discount rates would the company choose project? A? Project B? At what discount rate would the company be indifferent between these two projects? Explain.
2. Marigold Corp. is considering the purchase of a piece of equipment and has complied the information…
Bruin, Incorporated, has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 −$ 66,000 −$ 66,000 1 42,000 28,400 2 36,000 32,400 3 24,000 38,000 4 15,200 24,400 a-1. What is the IRR for each of these projects? a-2. If you apply the IRR decision rule, which project should the company accept? b-1. Assume the required return is 12 percent. What is the NPV for each of these projects? b-2. Which project will you choose of you apply the NPV decision rule? c-1. Over what range of discount rates would you choose Project A? c-2. Over what range of discount rates would you choose Project B? d. At what discount rate would you be indifferent between these two projects?
Bruin, Incorporated, has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 −$ 28,500 −$ 28,500 1 13,900 4,050 2 11,800 9,550 3 8,950 14,700 4 4,850 16,300 a-1. What is the IRR for each of these projects? a-2. Using the IRR decision rule, which project should the company accept? multiple choice 1 Project A Project B a-3. Is this decision necessarily correct? multiple choice 2 Yes No b-1. If the required return is 11 percent, what is the NPV for each of these projects? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2. Which project will the company choose if it applies the NPV decision rule? multiple choice 3 Project A Project B c. At what discount rate would the company be indifferent between these two projects? (Do not round intermediate…
Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows: MaintenanceEquipment RampFacilities ComputerNetwork Amount to be invested $923,468 $584,381 $269,896 Annual net cash flows: Year 1 400,000 292,000 168,000 Year 2 372,000 263,000 116,000 Year 3 340,000 234,000 84,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Required: 1. Assuming that the desired rate of return is 12%, prepare a net present value analysis for each proposal. Use…
We are analyzing a project and have gathered the following data. Based on this data, what is the average accounting rate of return? The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. Year Cash Flow Net Income 0 $285,000 n/a 1 $83,650 $12,400 2 $92,850 $21,600 3 $94,350 $23,100 4 $93,250 $22,000
Bluestone Ltd has provided the following figures for two investment projects, only one of which may be chosen. Project A Project B £ £ Initial outlay 190,000 170,000 Profit for year 1 55,000 15,000 2 40,000 25,000 3 25,000 45,000 4 10,000 65,000 Estimated resale value at end of year 4 50,000 20,000 Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 10%. a) Calculate the payback period, net present value and accounting rate of return for each project, and provide brief recommendations as to what project needs to be chosen based on the following: The Payback Period. The Accounting Rate of Return/Return on Capital Employed. The Net Present Value.
Continental Railroad Company is evaluating three capital investment proposals by using the net present value method. Relevant data related to the proposals are summarized as follows: MaintenanceEquipment RampFacilities ComputerNetwork Amount to be invested $614,361 $418,741 $186,316 Annual net cash flows: Year 1 318,000 229,000 134,000 Year 2 296,000 206,000 92,000 Year 3 270,000 183,000 67,000 Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162 Required: 1. Assuming that the desired rate of return is 20%, prepare a net present value analysis for each proposal. Use…
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The directors of CEE Limited are currently considering two mutually exclusive investment projects - Status Quo and High Both projects are concerned with the purchase of new plant. The following data are available for each project. Status Qou High Tech Initial Cash flow 600,000 750,000 Year 1 120,000 185,000 2 145,000 185,000 3 170,000 185,000 4 190,000 185,000 5 220,000 185,000 6 240,000 185,000 7 - 185,000 8 - 185,000 The business has an estimated cost of capital of 15%. The business has sufficient funds to meet all capital expenditure requirements. Required: Calculate the payback period Calculate the net present value The approximate internal rate of return.

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