Reference no: EM133114181
Fitch Industries, Inc. is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects: A and B. The relevant after-tax cash flows for each project are shown in the following table. The firm's cost of capital is 14%.
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Project A
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Project B
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Initial Investment at t = 0
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($29,500)
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($28,000)
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Cash Inflows:
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Year 1:
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$10,000
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$11,000
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Year 2
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$10,000
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$10,000
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Year 3
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$12,000
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$9,000
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Year 4
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$12,000
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$8,000
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a. Calculate each project's Internal Rate of Return (IRR).
b. Calculate each project's "Modified Internal Rate of Return (MIRR).
c. Based on your above calculations and noting that Projects A and B are mutually exclusive, which project should be chosen? Why?
d. Assume that Project A and Project B each have a four-year life. The initial cost of each project is depreciated on a straight-line basis over this estimated four-year life. Neither of the two projects is expected to have any salvage value at the end of their respective useful lives. Given this information, calculate the "Accounting Rate of Return" (ARR) for each project.
e. If Fitch Industries has a minimum acceptable ARR of 15%, and noting that Project A and B are mutually exclusive, which project should be selected? Why?
PLEASE CAN YOU SHOW ME THE WORKINGS?