Reference no: EM132515677
1. You have analyzed two mutually exclusive (you can do one or the other - not both) projects of similar size and have compiled the following information based on your analysis. Both projects have 3- year lives. You have been asked for your best recommendation given this information. Do you accept Project A and why? Do you accept Project B and why?
Project A Project B
Net Present Value $571,224 $552,158
Payback Period 2.41 2.16
Average Accounting Return 12.34 12.78
Required AAR 11.5 11.5
2. What is the net present value and IRR of a project with the following cash flows if the required rate of return is 10 percent?
Year Cash Flow
0 -$106,000
1 45,000
2 45,000
3 55,000
3. You are considering two mutually exclusive (you can do one or the other - not both) projects with the following cash flows. Using NPV and IRR, which project should you accept if the discount rate is 5 percent? What if the discount rate is 10 percent?
Year Project A Project B
0 -$200,000 -$200,000
1 100,000 0
2 100,000 0
3 100,000 300,000
4. Susan is considering adding toys to her gift shop. She estimates that the cost of inventory will be $6,500. The remodeling expenses and shelving costs are estimated at $2,800. Toy sales are expected to produce net cash inflows of $3,300, $3,300, $4,300, and $4,300 over the next four years, respectively. What is the payback period? (Please round to three decimal places). Should Susan add toys to her store if she assigns a three-year payback period to this project? Why or why not?
5. A project has an initial cost of $124,400 and produces cash inflows of $67,200, $78,900, and $87,500 over three years, respectively. What is the discounted payback period if the required rate of return is 10 percent? (Please round to three decimal places).
6. The Broken Egg is considering a project that will produce sales of $87,000 a year for the next 4 years. The profit margin is estimated at 6 percent. The project will cost $90,000 and will be depreciated straight-line to a book value of zero over the life of the project. What is the AAR of this project? Using a required AAR of 11 percent, should Broken Egg invest in this project? (Please round to three decimal places).
Can you solve these 6 problems with detailed explanations?