The net present value for each investment

Assignment Help Financial Management

Reference no: EM132000454

A farmer must choose between two porssible investments that both require an initial outlay of $120,000 and will have no salvage value at the end of their economic life (3 years). The first investment is expected to yield annual net cash flows of $55,000 over a 3-year planning horizon. The seond will yield $30,000 in the first year, $40,000 in the seond, and $50,000 in the third.

a. Assuming no salvage value, no taxes, and a 5% discount rate, calculate (i) the simple rater of return (SRR) (initial investment only), (ii) the payback period, and (ii) the net present value (NPV) for each investment.

b. The farmer finances 50% of the investment with an outside loan (interest rate 4%), and the prinicpal will be paid in three equal yearly installments. Assume the farmer is on the 20% tax bracket and tat the cost of captial is 5%. Assess the profitability of the two investments with NPV for the ROA and NPV for the ROE approaches.

c. Given your answers what investment would you recommend? Justify your answer.

Reference no: EM132000454

Questions Cloud

How much jose is required to include in his gross income : The fair market value of Jose's services is $10,000. Explain how much Jose is required to include in his gross income and why

Find the effective annual interest rate for each case : Find the effective annual interest rate for each case. What is the effective annual interest rate on the loan, taking account of the impact of initiation fee?

What is the net present value and the profitability index : Millenium Genetics Corporation has a proposal for a project that will have the following cash flows in the next four years. What is the net present value.

What is an appropriate cost of capital for given division : Miller Sisters has an overall beta of 1.27 and a cost of equity of 13.4 percent for the firm overall. The firm is all-equity financed.

The net present value for each investment : Calculate the simple rater of return (SRR) (initial investment only), the payback period, and the net present value (NPV) for each investment.

What are the four main families of probiotics : What foods provide us with these bacteria? Are any of these foods unfamiliar to you? If yes, which ones?What are the four main families of probiotics?

Calculate the market capitalization rate : Miltmar Corporation will pay a year-end dividend of $3, and dividends thereafter are expected to grow at the constant rate of 5% per year.

Describe the tolerable exception rate : Describe the tolerable exception rate and how you would use this as an auditor. Explain how you would determine the rate you select

What tax issues should milton and shirley consider : Milton and Shirley file a joint tax return on which they itemize their deductions and report AGI of $50,000. During the year, they incurred $1,500 of medical.

User Account

All Pages