Question
Without using excel, solve : A company has identified two mutually exclusive cost saving projects. However, the equipment that will be required to realize the
Without using excel, solve : A company has identified two mutually exclusive cost saving projects. However, the equipment that will be required to realize the cost savings need an upfront investment of $250 million for both the projects. The annual cost savings expected from project 1 is 15% of the annual revenues and from project 2 is 12% of the annual revenues. The equipment used in both the projects have a useful life of 4 years. The firm has decided to employ a Straight Line Method (SLM) of depreciation and the ending period book value is zero for both the equipment. The firm expects to sell the equipment for projects 1 and 2 for $50 million and $100 million respectively at the end of 4 years. The year 1 revenue projected for this firm is $500 million, which is expected to grow at an annual growth rate of 5% for the subsequent years. The tax rate in the country is 15%. Which project would you choose based on a discounting rate of 10% ?
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