Title Net Present Value versus Internal Rate of Return Skiba Company is thinking about two different... Description Net Present Value versus Internal Rate of Return Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow: Year 0 1 2 Project I $(100,000) 134,560 Project II $(100,000) 63,857 63,857 Skiba's cost of capital is 10 percent. Required: 1. Compute the NPV and the IRR for each investment. 2. Conceptual Connection: Explain why the project with the larger NPV is the correct choice for Skiba.
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- Average Rate of Return Method, Net Present Value Method, and analysis for a Service CompanyThe capital investment committee of Ellis Transport and Storage Inc. is considering two investmentprojects. The estimated income from operations and net cash flows from each investment are as follows:Warehouse Tracking TechnologyYear Income from Operations Net Cash Flow Income from Operations Net Cash Flow1 $ 61,400 $135,000 $ 34,400 $108,0002 51,400 125,000 34,400 108,0003 36,400 110,000 34,400 108,0004 26,400 100,000 34,400 108,0005 (3,600) 70,000 34,400 108,000Total $172,000 $540,000 $172,000 $540,000Each project requires an investment of $368,000. Straight-line depreciation will be used, and no residualvalue is expected. The committee has selected a rate of 15% for purposes of the net present valueanalysis.Present Value of $1 at Compound InterestYear 6% 10% 12% 15% 20%1 0.943 0.909 0.893 0.870 0.8332 0.890 0.826 0.797 0.756 0.6943 0.840 0.751 0.712 0.658 0.5794 0.792 0.683 0.636 0.572 0.4825…Saved A company is considering the following three Investment projects (Ignore income taxes.): Investment required Present value of cash inflows Project C $46,800 $ 51,948 Project D $ 53,300 $ 61,828 Project E $110,500 $ 120,445 Rank the projects according to the profitablity index, from most profitable to least profitable. Multiple Choice D. C. E C.E. D E. C. D E. D. CAverage Rate of Return Method, Net Present Value Method, and Analysis The capital investment committee of Overnight Express Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows: Distribution Center Expansion Internet Tracking Technology Year Income fromOperations NetCash Flow Income fromOperations NetCash Flow 1 $55,000 $175,000 $116,000 $280,000 2 55,000 175,000 88,000 236,000 3 55,000 175,000 44,000 166,000 4 55,000 175,000 19,000 114,000 5 55,000 175,000 8,000 79,000 Total $275,000 $875,000 $275,000 $875,000 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…
- Average rate of return method, net present value method, and analysis for a service company The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Year Robotic AssemblerOperating Income Robotic AssemblerNet Cash Flow WarehouseOperating Income WarehouseNet Cash Flow 1 $47,500 $152,000 $100,000 $243,000 2 47,500 152,000 76,000 205,000 3 47,500 152,000 38,000 144,000 4 47,500 152,000 17,000 99,000 5 47,500 152,000 6,500 69,000 Total $237,500 $760,000 $237,500 $760,000 Each project requires an investment of $500,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis. 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…Average rate of return method, net present value method, and analysis for a service company The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Year Robotic AssemblerOperating Income Robotic AssemblerNet Cash Flow WarehouseOperating Income WarehouseNet Cash Flow 1 $34,200 $105,000 $72,000 $168,000 2 34,200 105,000 55,000 142,000 3 34,200 105,000 27,000 100,000 4 34,200 105,000 12,000 68,000 5 34,200 105,000 5,000 47,000 Total $171,000 $525,000 $171,000 $525,000 Each project requires an investment of $360,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis. 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…Average Rate of Return Method, Net Present Value Method, and Analysis for a Service Company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Year Operating Income net cash flow Operating Income Net cash Flow 1 $25,000 40,000 11,250 26,250 2 20,000 35,000 11,250 26,250 3 7,000 22,000 11,250 26,250 4 3,000 18,000 11,250 26,250 5 1,250 16,250 11,250 26,250 Total $56,250 $131,250 $56,250 $131,250 Each project requires an investment of $75,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. 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…
- Net Present Value Versus Internal Rate of Return For discount factors use Exhibit 12B-1 and Exhibit 12B-2. Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow: Year Project I Project II 0 $(100,000) $(100,000) 1 — 63,857 2 134,560 63,857 Skiba's cost of capital is 10%. Required: 1. Compute the NPV and the IRR for each investment. Round present value calculations and your final NPV answers to the nearest dollar. Round IRR answers to the nearest whole percent. NPV IRR Project I $fill in the blank 1 fill in the blank 2 % Project II $fill in the blank 3 fill in the blank 4 % 2. Conceptual Connection: Explain why the project with the larger NPV is the correct choice for Skiba. NPV is an measure and reveals how much the value of the firm will change for each project. IRR gives a measure of . Thus, since NPV reveals the…The user cost of capital: Consider the basic formula for the user cost ofcapital in the presence of a corporate income tax. Suppose the baseline casefeatures an interest rate of 2 percent, a rate of depreciation of 6 percent, aprice of capital that rises at 1 percent per year, and a 0 percent corporate taxrate. Starting from this baseline case, what is the user cost of capital after thefollowing changes?(a) No changes—the baseline case.(b) Te corporate tax rate rises to 35 percent.(c) Te interest rate doubles to 4 percent.(d) Both (b) and (c).Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Year OperatingIncome Net CashFlow OperatingIncome Net CashFlow 1 $55,800 $181,000 $117,000 $290,000 2 55,800 181,000 89,000 244,000 3 55,800 181,000 45,000 172,000 4 55,800 181,000 20,000 118,000 5 55,800 181,000 8,000 81,000 Total $279,000 $905,000 $279,000 $905,000 Each project requires an investment of $620,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. 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…
- Average rate of return method, net present value method, and analysis for a service company The capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Year Robotic Assembler Operating Income Robotic Assembler Net Cash Flow Warehouse Operating Income Warehouse Net Cash Flow 1 $52,800 $172,000 $111,000 $275,000 2 52,800 172,000 84,000 232,000 3 52,800 172,000 42,000 163,000 4 52,800 172,000 18,000 112,000 5 52,800 172,000 9,000 78,000 Total $264,000 $860,000 $264,000 $860,000 Each project requires an investment of $480,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. Present Value of $1 at Compound Interest Year 6%. Required: Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest…Assume a firm has EBAT of $590,000, and no amortization. It is in a 40 percent tax bracket. a. Compute its cash flow. $ 354,000 b. Assume it has $590,000 in amortization. Recompute its cash flow. $ 590,000 c. How large a cash flow benefit did the amortization provide? $T] Cash flow Cash flow Benefit in cash flowAverage Rate of Return Method, Net Present Value Method, and Analysis for a service company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Operating Net Cash Operating Net Cash Year Income Flow Income Flow 1 $55,800 $172,000 $117,000 $275,000 2 55,800 172,000 89,000 232,000 55,800 172,000 45,000 163,000 4 55,800 172,000 20,000 112,000 5 55,800 172,000 8,000 78,000 Total $279,000 $860,000 $279,000 $860,000 Each project requires an investment of $620,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. 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 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 0.747 0.621…