The Fun Foods Corporation must decide on what new product lines to introduce next year. After-tax cash
Question:
The Fun Foods Corporation must decide on what new product lines to introduce next year. After-tax cash flows are listed below along with initial investments. The firm's cost of capital is 12 percent and its target accounting rate of return is 20 percent. Assume straight-line depreciation and an asset life of five years. The corporate tax rate is 35 percent. All projects are independent.
Project Investment Year 1 2 3 4 5
A 5,000 800 1000 350 1,250 3,000
B 7,500 1,250 3,000 2,500 5,000 5,000
C 4,000 600 1,200 1,200 2,400 3,000
a. Calculate the accounting rate of return on the project. Which projects are acceptable according to this criterion? (Note: Assume net income is equal to after-tax cash flow less
b. Calculate the payback period. All projects with a payback of fewer than four years are acceptable. Which are acceptable according to this criterion?
c. Calculate the projects' NPVs. Which are acceptable according to this criterion?
d. Calculate the projects' IRRs. Which are acceptable according to this criterion?
e. Which projects should be chosen?
CorporationA Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
a Project A Project B Project C Total AT Cash Flow 6400 16750 8400 Total Depreciation 5000 7500 4000 ...View the full answer
