Wriston Company has $220,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:
A
B
Cost of equipment required
$220,000
$0
Working capital investment required
$0
$220,000
Annual cash inflows
$95,000
$85,000
Salvage value of equipment in four years
$22,000
$0
Life of the project
4 years
4 years
The working capital needed for project B will be released for investment elsewhere at the end of four years. Wriston Company uses a 18% discount rate. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
a.
Calculate net present value for each project. (Negative amounts should be indicated by a minus sign.Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.Omit the "$" sign in your response.)
Net Present Value
Project A
$
Project B
$
b.
Which investment alternative (if either) would you recommend that the company accept?
Project B
Project A
Yancey Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:
Project
Investment Required
Net Present Value
Life of the Project (years)
Internal Rate of Return
A
$830,000
$240,960
7
18%
B
$660,000
$225,820
12
17%
C
$530,000
$175,860
7
19%
D
$730,000
$165,320
3
22%
The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, which to accept second, and so forth. The companys investment funds are limited.
Required:
1.
Compute the project profitability index for each project. (Round your answers to 2 decimal places.)
Project
Profitability Index
A
B
C
D
2.
In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.
Net Present Value
Project Profitability Index
Internal Rate of Return
First preference
(Click to select)ABCD
(Click to select)BCAD
(Click to select)DCAB
Second preference
(Click to select)ABCD
(Click to select)BCAD
(Click to select)DCAB
Third preference
(Click to select)ABCD
(Click to select)BCAD
(Click to select)DCAB
Fourth preference
(Click to select)ABCD
(Click to select)BCAD
(Click to select)DCAB
Answer & Explanation
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