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 4MAD

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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…
Assume that you have two projects (A and B) the life of the two proposals with the respective net cash flows are given below. Expected Net Cash Flows Year (t) B (110,000) (110,000) 71,000 51,000 21,000 Depreciation, salvage values, net working capital requirements, and tax effects are 1 11,000 61,000 81,000 2 3 all included in these cash flows. You also have made subjective risk assessments of each Proposal and concluded that both Proposals have risk characteristics that require a return of 10%. Instruction; a. Define the term net present value (NPV). i. What is each Proposal's NPV? What is the rationale behind the NPV method? According to NPV, which Proposal. or Proposals should be accepted if they are Independent? Mutually exclusive? Would the NPVS change if the cost of capital changed? ii. iii. b. Define the term internal rate of return (IRR). What is each Proposal's IRR? What is the logic behind the IRR method? According to IRR, which Proposals should be accepted if they are…
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?
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Boxwood, Incorporated is considering three independent investment opportunities. The present value of future cash flows, initial investment, and net present value for each of the projects are as follows: Present value of future cash flows Initial investment Net present value Project A $ 1,790,000 790,000 $ 1,000,000 In what order should Boxwood prioritize investment in the projects? Project B. $ 1,780,000 800,000 $980,000 Project C $ 1,610,000 750,000 $ 860,000 Multiple Choice A, B, C B, C, A О О A, C, B B, A, C 的
ABC Company has calculated the net present value of two investment opportunities but must decide which option to pursue: Project X: Present value of cash flows = $117,000 Investment = $100,000 Net present value = $17,000 Project Z: Present value of cash flows = $138,000 Investment = $120,000 Net present value = $18,000 Complete the following: Present value ratio of Project X = Present value ratio of Project Z = Decision = Invest in (Project X/Project Z)
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

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