A company is considering two mutually exclusive projects. The projected cash flows are as follows: Cash Flows:A
Question:
A company is considering two mutually exclusive projects. The projected cash flows are as follows:
| Cash Flows:A | Cash Flows:B | |
| Year | ||
| 0 | -$245,000 | -$250,000 |
| 1 | $70,500 | $60,000 |
| 2 | $85,000 | $60,000 |
| 3 | $90,000 | $70,000 |
| 4 | $125,000 | $110,000 |
a) The company's required rate of return is 8%. Which project, if either, should the company choose?
b) What is the discounted payback period for each? (25 marks)
Q2.
Moncton Motors Inc. has recently bought an asset costing $625,000. The asset assumes a useful of 4-year, $80,000 salvage value, and is depreciated on a straight-line method. It is reported that the company posted net income of $20,000, $25,500, $20,000, and $21,000 over the last four years. Calculate the company's average accounting return over the past four years based on the information given above (Show all necessary calculations.) (25 marks)
Q3.
Pinto Corp. is considering the purchase of a major piece of equipment for its Winnipeg manufacturing plant. The project would cost $22m in initial investment and would result in cost savings, before tax, of $3.25m per year for five years. The equipment could be sold for $4.5m at the end of the five years. The company's CCA rate is 25% and the corporate tax rate is 34%.
The company's required rate of return is 11%. Using the tax shield approach, work out the NPV for Pinto's project. ( 25 marks)
Q4.
The Ontario Teachers Pension Plan has the responsibility to manage the retirement savings of teachers in the province of Ontario. The Plan presents its views on policies for corporate governance here: https://www.otpp.com/en-ca/ From a shareholders perspective, what role should social responsibility and ethical considerations play in a firm's investment analysis? Can these non financial factors actually enhance shareholder value in the long term? How should companies take this into account when making NPV decisions? ( 25 marks)
Expert Answer:
1 A Project A should be chosen Using 8 discount rate NPV of Project A 245000 705001081 850001082 900001083 1250001084 19600 NPV of Project B 250000 60... View the full answer
