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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Question
The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted.
|
|
Project A |
Project B |
Project C |
|
Initial Cost |
$230,000 |
$250,000 |
$190,000 |
|
Expected life |
5years |
5 years |
4 years |
|
Scrap value expected |
$10,000 |
$15,000 |
$10,000 |
|
Expected |
$ |
$ |
$ |
|
End Year 1 |
85,000 |
95,000 |
45,000 |
|
End Year 2 |
70,000 |
70,000 |
65,000 |
|
End Year 3 |
65,000 |
55,000 |
95,000 |
|
End Year 4 |
60,000 |
50,000 |
100,000 |
|
End Year 5 |
50,000 |
50,000 |
|
The company estimates cost of capital is 18%. The table below shows the present value of $1 at 14%, 18% and 22%.
|
Periods |
14% |
18% |
22% |
|
1 |
0.877 |
0.847 |
0.820 |
|
2 |
0.769 |
0.718 |
0.672 |
|
3 |
0.675 |
0.609 |
0.551 |
|
4 |
0.592 |
0.516 |
0.451 |
|
5 |
0.519 |
0.437 |
0.370 |
|
6 |
0.456 |
0.370 |
0.303 |
Required:
Calculate:
- The payback period for each project
- The accounting
rate of return for each project - The
net present value for each project - The
internal rate of return - Which project should be accepted – give reasons.
- Explain the factors that management would need to consider in addition to the financial factors before making a final decision on a project.
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