Need help with Question C

A. Using the Average Rate of Return, which project, if any, would you evaluate further and why?

Years	Project 1	Project 2
1	3,370	8,000
2	3,500	8,000
3	4,100	8,000
4	4,270	8,000
5	4,620	8,000
Investment Required	18,000	33,200

Average Return	19,860/5 = 3,972	40,000/5 = 8,000
Average Investment	18,000/2 = 9,000	33,200/2 = 16,600
Average Rate of Return	9,000/3,972 = 2.26%	16,600/8,000 = 2.07%

Since Project 2 is giving more Average Rate of return, it will be further evaluated.

B. Using Net Present Value analysis, please answer the following questions: Project 1

Years	Profit	Profit + Depreciation	Cashflow	PV of $1	Cashflow Discount
1	3,370	2,000	5,370	.909	4,881.33
2	3,500	2,000	5,500	.826	4,543
3	4,100	2,000	6,100	.751	4,581.10
4	4,270	2,000	6,270	.683	4,282.41
5	4,620	2,000	6,620	.621	4,111.02
Total				3.971	22,398.86
Initial Investment NPV					-18,000 =4,398.86

#1. Assuming you had $100,000 available to spend on capital projects, which investment would you make, if any, and why?

Project 1:

Present value of outflow (Investment) = $100,000

Net present value of Project 1 = 22,398.36 - 100,000 = -77,601.14

Project 2:

Present Value of inflow = 8,000 x PV

8,000 x 3.791 = $30,328

Present value of outflow = $100,000

Net present value of Project 2 = 30,328 - 100,000 = -69,672

In conclusion, in the net value analysis, we accepted the project with a positive net present value. Here the net present value of both are negative so it is advisable to not accept both projects. If it is necessary to invest I would go with the least negative project which is project 2.

C. Why are we establishing a minimum required rate of return (in this case 10%)? Why do we want a project to earn more than this rate? (Hint: Think back to last chapter). If we earn more than the minimum required rate of return, what happens to the value of the company? What other business/industry is this illustrated most clearly?