A manufacturing company is considering two types of industrial projects that require the same level of initial investment but provide different levels of operating cash flows over the project life. The in house engineer has compiled the following financial data related to both projects, including the rate of return figures. Net Cash Flow Incremental (A - B) n Project A Project B 0 -$18,000 -$18,000 0 1 960 11,600 -10,640 2 7,400 6,500 900 3 13,100 4,000 9,100 4 7,560 3,122 4,438 18% 20% 14.72% The company has been using the internal rate of return as a project justification tool, and these projects will be evaluated based on the principle of rate of return. The firm's minimum required rate of return is known to be 12%. Which project should you select? O a. Select B, because it recovers most of investment during the first year. O b. Select A, because its increment of investment exceeds 12%. O c. Select B, because its rate of return is higher than A with the same initial investment. O d. Select B, because it can generate 20% profit (as opposed to 18 % for project A) for every dollar invested.

A manufacturing company is considering two types of industrial projects that require the same level of initial investment but provide different levels of operating cash flows over the project life. The in house engineer has compiled the following financial data related to both projects, including the rate of return figures. Net Cash Flow Incremental (A - B) n Project A Project B 0 -$18,000 -$18,000 0 1 960 11,600 -10,640 2 7,400 6,500 900 3 13,100 4,000 9,100 4 7,560 3,122 4,438 18% 20% 14.72% The company has been using the internal rate of return as a project justification tool, and these projects will be evaluated based on the principle of rate of return. The firm's minimum required rate of return is known to be 12%. Which project should you select? O a. Select B, because it recovers most of investment during the first year. O b. Select A, because its increment of investment exceeds 12%. O c. Select B, because its rate of return is higher than A with the same initial investment. O d. Select B, because it can generate 20% profit (as opposed to 18 % for project A) for every dollar invested.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 2PA

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A company has two projects that are under evaluation. The project investment costs, annual projected cash flows, and required rates of return are shown below: Project 1 Project 2 Rate of Return: 0.065 0.065 Project Cost: -$1,397,654 -$1,619,835 Year 1 $245,367 $267,345 Year 2 $302,542 $343,563 Year 3 $316,543 $367,834 Year 4 $367,843 $432,098 Year 5 $450,425 $589,435 Compute the NPV for each project using Microsoft Excel NPV's function. Be sure to show your work. Which project should be pursued? Why?
he capital investment committee of Iguana Inc. is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Year Robotic AssemblerOperating Income Robotic AssemblerNet Cash Flow WarehouseOperating Income WarehouseNet Cash Flow 1 $50,400 $157,000 $106,000 $251,000 2 50,400 157,000 81,000 212,000 3 50,400 157,000 40,000 149,000 4 50,400 157,000 18,000 102,000 5 50,400 157,000 7,000 71,000 Total $252,000 $785,000 $252,000 $785,000 Each project requires an investment of $480,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 10% for purposes of the net present value analysis. Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8…
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ital investment committee of Iguana Inc. is considering two capital investments. The estimated ig income and net cash flows from each investment are as follows: Year Robotic Assembler ng Income Robotic Assembler Net Cash Flow Warehouse Operating Income Warehouse Net Cash 35,000 $65,000 $21,000 $ 25,000 55,000 21,000 51,000 3 20,000 50,000 21,000 51,000 4 15,000 45,000 21,000 51,000 5 10,000 40,000 21,000 51,000 05,000 $255,000 $105,000 $255,000 Each project requires an investment of $150,000. Straight-line ation will be used, and no residual value is expected. The committee has selected a rate of 12% for s of the net present value analysis. Present Value of $1 at Compound Interest Year 12% 15% 20% 10.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.68: d: 1a. Compute the average rate of return for each investment. If required, round your answer to one place. Investment Committee Average Rate of Return Robotic Assembler % Warehouse %…
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