Black & White Enterprises is considering invest­ ing in either of two mutually exclusive projects, X and

Question:

Black & White Enterprises is considering invest­ ing in either of two mutually exclusive projects, X and Y. Project X requires an initial investment of US$30,000; project Y requires US$40,000. Each project's cash inflows are 5­year annuities: Project X's inflows are US$10,000 per year; project Y's are US$15,000. The firm has unlimited funds and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 15 percent.
a. Find the NPV for each project. Are the projects acceptable?
b. Find the breakeven cash inflow for each project.
c. The firm has estimated the probabilities of achieving various ranges of cash inflows for the two projects, as shown in the following table. What is the probability that each project will achieve the breakeven cash inflow found in part b?
Black & White Enterprises is considering invest­ ing in either

d. Which project is more risky? Which project has the potentially higher NPV? Discuss the risk-return tradeoffs of the two projects.
e. If the firm wished to minimize losses (that is, NPV 6 US$0), which project would you recommend? Which would you recommend if the goal was achieving a higher NPV?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Principles of Managerial Finance

ISBN: 978-1408271582

Arab World Edition

Authors: Lawrence J. Gitman, Chad J. Zutter, Wajeeh Elali, Amer Al Roubaix

Question Posted: