Question
A company is considering two investment projects. Each requires an initial investment of 200,000. This asset has a depreciation period of 4 years, and the
A company is considering two investment projects. Each requires an initial investment of 200,000. This asset has a depreciation period of 4 years, and the company uses the straight-line method to calculate depreciation. The discount rate is 16%. Below are the expected profits for each year, as well as the residual value of the assets in which the company will invest. Investment programs A B Expected profits Year 1 80,000 30,000 2 80,000 50,000 3 40,000 90,000 4 20,000 120,000 Residual value at the end of the 4th year 40,000 40,000
Below is the Present Value of a monetary unit (with a discount rate of 16%) for each year. End of Year 1 0.862 2 0.743 3 0.641 4 0.552
Note: For the calculation of the Net Present Value and the Recovery Period you will need the annual net cash flows (which are not given in the exercise). That's why you need to convert your expected profits into cash flows. The difference between the two is the annual depreciation of the assets.
Requested: . 1) Calculate the Net Present Value of the two investment programs and briefly explain which of the two will be preferred and why. . 2) Calculate the Payback Period of the two investment programs. 3) Calculate the Internal Rate of Return of the investment program you will choose above.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started