Question
Mercken Industries Mercken Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash
Mercken Industries Mercken Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12 percent, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12 percent.
| Project P | Project Q | Project R | Project S | |
| Initial cost | $200,000 | $235,000 | $190,000 | $210,000 |
| Annual Cash Flows | ||||
| Year 1 | $ 93,000 | $ 90,000 | $ 45,000 | $ 40,000 |
| Year 2 | 93,000 | 85,000 | 55,000 | 50,000 |
| Year 3 | 93,000 | 75,000 | 65,000 | 60,000 |
| Year 4 | 0 | 55,000 | 70,000 | 65,000 |
| Year 5 | 0 | 50,000 | 75,000 | 75,000 |
| Net present value | $23,370 | $29,827 | $27,233 | $(7,854) |
| Internal rate of return | 18.7% | 17.6% | 17.2% | 10.6% |
| Excess present value index | 1.12 | 1.13 | 1.14 | 0.95 |
Refer to Mercken Industries. Which project(s) will the company choose?
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