Question
Q 4 . Joyce is a new assistant manager in Peace AgBiz. H er boss asked h er to evaluate the capital budget opportunities of
Q4. Joyce is a new assistant manager in Peace AgBiz. Her boss asked her to evaluate the capital budget opportunities of two potential investments: Project A and Project B. Joyce has not much knowledge about capital budgeting decision procedures, so she asked you for help. Fill out the following table and then answer the following questions. (10 points in total)
|
| Project A |
|
| Project B |
|
Year | After Tax Benefit ($) | Present Value Factor
| After Tax present value of benefit | After Tax Benefit($) | Present Value Factor | After Tax present value of benefit |
Year 1 | $4,000 |
|
| $2,000 |
|
|
Year 2 | $6,000 |
|
| $3,000 |
|
|
Year 3 | $3,000 |
|
| $4,000 |
|
|
Year 4 | $2,000 |
|
| $5,000 |
|
|
Year 5 | $1,000 |
|
| $6,000 |
|
|
Year 6 | $1,000 |
|
| $7,000 |
|
|
Total |
|
|
|
|
|
|
Note: The discount/interest rate is 7% and the initial total cost is $10,000
- If the maximum payback period is allowed is 5 years, use the Payback method to find which project should Paul choose. (2 points)
- If the average yearly investment for both Project A and Project B are $10,000, use the Average Rate of Return method to find the project Paul should choose. (2 points)
- Use the Net Present Value Method to help Paul make a decision. (2 points)
- Use the Benefit /Cost Ratio to help him make a decision. (2 points)
- Use the Amortization Method to find which project should be accepted. (2 points)
(Hint: find the equivalent annual cost (EAC) first, and then find the net benefit and Benefit/Cost ratio)
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