Previous Page Next Page Page 3 of 4 Question 3 (21 points) Saved (21 points total). The timing of cash flows is very important in evaluating capital investments, Management is considering investing in one of three projects. Each project has an initial investment of $150,000 in an asset that will have no residual value and a four year life. Each project has the same degree of risk. The cash flow project follows: Year 1 Project David Eric Fred $50,000 $20,000 $100,000 Year 2 50,000 30,000 50,000 Year 3 50.000 50,000 30.000 Year 4 50,000 100,000 20.000 Total $200,000 $200.000 $200,000 a (4 points) Calculate the payback period for projects David and Fred. Show your work. Which project is better? Why? b. (4 points) Calculate the average rate of return (uses accounting income for David and Eric. Remember that the accounting income will be equal to the above cash flow projections reduced by the depreciation expense The company uses the straight line depreciation method, under which depreciation expense is S37,500 per year Which project is better? Why? Show your work C. (9 points) The company uses an 10% discount rate in evaluating capital investment projects. Some present value factors are shown below. Using these factors or your financial calculator, calculate the present value of the cash flows for each project. PV of $1 at 10% PV of S1 at 12% No. of periods in A s a 40 2:34 PM 5/2020 F c. (9 points) The company uses an 10% discount rate in evaluating capital investment projects. Some present value factors are shown below. Using these factors or your financial calculator, calculate the present value of the cash flows for each project. PV of $1 at 10% PV of $1 at 12% No. of periods (n) 1 2 3 4 90909 82645 .75132 68301 89286 79719 71178 .63552 David, PV of cash flows = Eric, PV of cash flows = Fred, PV of cash flows = d. (4 points) The owner of the business likes project David best because it has a nice even cash flow from year to year. Also, she says that they have always used the average rate of return method to evaluate projects, and since each project has the same average cash flow each project is an equally good choice. Is this the best way to analyze the options? What analysis method would you recommend