Asked by Conner Reiss on May 09, 2024
Verified
Niro Company has money available for investment and is considering two projects each costing $71000. Each project has a useful life of 3 years and no salvage value. The investment cash flows follow:
Instructions
If 8% is an acceptable earnings rate which project should be selected? Justify your response. (Table 1 from Appendix C is needed.)
Acceptable Earnings Rate
The minimum rate of return on investment that a company or investor is willing to accept, considering the risk and opportunity cost of the investment.
Useful Life
The estimated period over which a fixed asset is expected to be usable by the business, impacting depreciation calculations.
Salvage Value
An estimation of what an asset will be worth at the end of its usable life.
- Evaluate the feasibility of projects using various capital budgeting methods.
Verified Answer
LT
Literally ToastMay 14, 2024
Final Answer :
Project B is acceptable since its net present value is positive. This indicates that project B provides a return greater than the company's minimum expected return of 8%. Project A earns less than an 8% return. Project A
Year 1 $8,000×.926=$7,408 Year 2 $24,000×.857=20,568 Year 3 $52,000×.794=41,288Present value of cash inflows 69,264Cash purchase price (71,000)Net present value of project A$(1,736)\begin{array}{lrr}\text { Year 1 } & \$ 8,000 \times .926= & \$ 7,408 \\\text { Year 2 } & \$ 24,000 \times .857= & 20,568 \\\text { Year 3 } & \$ 52,000 \times .794= & 41,288\\\text {Present value of cash inflows }&69,264\\\text {Cash purchase price }&(71,000)\\\text {Net present value of project \( A \)}&\$(1,736)\end{array} Year 1 Year 2 Year 3 Present value of cash inflows Cash purchase price Net present value of project A$8,000×.926=$24,000×.857=$52,000×.794=69,264(71,000)$(1,736)$7,40820,56841,288
Project B\mathrm { B }B
Year 1 $28,000×.926=$25,928 Year 2 $28,000×.857=23,996 Year 3 $28,000×.794=22,232 Present value of cash inflows 72,156 Cash purchase price (71,000) Net present value of project B $1,158\begin{array}{llr}\text { Year 1 } & \$ 28,000 \times .926= & \$ 25,928 \\\text { Year 2 } & \$ 28,000 \times .857= & 23,996 \\\text { Year 3 } & \$ 28,000 \times .794= & 22,232 \\\text { Present value of cash inflows } & 72,156 \\\text { Cash purchase price } & (71,000)\\\text { Net present value of project B } & \$ 1,158\end{array} Year 1 Year 2 Year 3 Present value of cash inflows Cash purchase price Net present value of project B $28,000×.926=$28,000×.857=$28,000×.794=72,156(71,000)$1,158$25,92823,99622,232
Year 1 $8,000×.926=$7,408 Year 2 $24,000×.857=20,568 Year 3 $52,000×.794=41,288Present value of cash inflows 69,264Cash purchase price (71,000)Net present value of project A$(1,736)\begin{array}{lrr}\text { Year 1 } & \$ 8,000 \times .926= & \$ 7,408 \\\text { Year 2 } & \$ 24,000 \times .857= & 20,568 \\\text { Year 3 } & \$ 52,000 \times .794= & 41,288\\\text {Present value of cash inflows }&69,264\\\text {Cash purchase price }&(71,000)\\\text {Net present value of project \( A \)}&\$(1,736)\end{array} Year 1 Year 2 Year 3 Present value of cash inflows Cash purchase price Net present value of project A$8,000×.926=$24,000×.857=$52,000×.794=69,264(71,000)$(1,736)$7,40820,56841,288
Project B\mathrm { B }B
Year 1 $28,000×.926=$25,928 Year 2 $28,000×.857=23,996 Year 3 $28,000×.794=22,232 Present value of cash inflows 72,156 Cash purchase price (71,000) Net present value of project B $1,158\begin{array}{llr}\text { Year 1 } & \$ 28,000 \times .926= & \$ 25,928 \\\text { Year 2 } & \$ 28,000 \times .857= & 23,996 \\\text { Year 3 } & \$ 28,000 \times .794= & 22,232 \\\text { Present value of cash inflows } & 72,156 \\\text { Cash purchase price } & (71,000)\\\text { Net present value of project B } & \$ 1,158\end{array} Year 1 Year 2 Year 3 Present value of cash inflows Cash purchase price Net present value of project B $28,000×.926=$28,000×.857=$28,000×.794=72,156(71,000)$1,158$25,92823,99622,232
Learning Objectives
- Evaluate the feasibility of projects using various capital budgeting methods.