Assume the following information for all of the questions in this assignment. TOM's Tomatoes and Herbs, LLC is considering investing in two alternative projects to improve the processing and packaging of TOM's Old World Spaghetti Sauce. Investment A has a lifespan of 10 years and initial costs of $50,000. Investment B has a lifespan of 7 years and initial costs of $35,000. TOM's Tomatoes and Herbs, LLC assumes a 5 percent discount rate on potential investments. Investment A Projected After-Tax Benefits per Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 $2,000 $4,000 $5,000 $8,000 $10,000 $10,000 $8,000 $6,000 $4,000 $2,000 Investment B Projected After-Tax Benefits per Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $9,500 $8,500 $7,500 $6,500 $5,500 $4,250 Year 7 $3,250 1) What is the Payback period of each potential investment by TOM's Tomatoes and Herbs, LLC? Round to the nearest tenth. Investment A Investment B: 2) If TOM's Tomatoes and Herbs, LLC has a required Payback period of 5 years, which project would be chosen and why? 3) Calculate annual depreciation for each investment using the straight line depreciation method. The salvage value for Investment A is $5,000 and for Investment B, the salvage value is $3,500 Annual Depreciation for Investment A. Annual Depreciation for Investment B- 4) What are the Average Annual Rates of Return of each investment? Remember on Jan 1 of Year 1, the value of the investment is the initial cost. You must remove annual depreciation to get the value on Dec 31. Jan 1 of Year 2 is the same as the value on Dec 31 of the year prior and so on. Round to the nearest dollar for the table and nearest tenth for the percentage. Investment B Investment A Value Value Dec Benefits Jan 1 31 After- Tax Average Annual Value After- Average Value Value Annual Benefits Jan 1 Dec 31 Value Tax Year 1 Year 1 Year 2 Year 2 Year 3 Year 3 Year 4 Year 4 Year 5 Year 5 Year 6 Year 6 Year 7 Year 7 Year 8 Average: Year 9 Average Annual Rate of Return: % Year 10 Which investment would TOM's choose? Average: Average Annual Rate of Return: 5) What is the Equivalent Annual Cost of each investment to TOM's Tomatoes and Herbs, LLC? Investment A: Investment B: 6) Fill in the following table to calculate the net present value and benefit/cost ratio of each investment. Round to the nearest dollar or hundredth in the benefit/cost ratio. Investment A Investment B Yearly Present After-tax Yearly Present After-tax Year After- Present X Value After- Present x Value tax Value tax Value of of Benefit Factor Benefit Benefits Factor Benefits 1 1 Year 2 2 3 3 5 5 6 6 7 8 9 10 Present Value of Total Benefits Present Value of Total Benefits Less Initial Cost Less Initial Cost Net Present Value Net Present Value Benefit/Cost Ratio Benefit/Cost Ratio If TOM's Tomatoes and Herbs, LLC can only afford to invest in one project, which project should they invest in and why
