125. A company is considering two alternative investment opportunities, each of which requires an initial cash outlay of $110,000. The expected net cash flows from the two projects follow:
|
Project A
|
Project Z
|
Year 1
|
$ 30,000
|
$ 44,000
|
Year 2
|
44,000
|
70,000
|
Year 3
|
70,000
|
30,000
|
Totals
|
$144,000
|
$144,000
|
|
|
|
Required:
a, Based on a comparison of their net present values, and assuming the same discount rate (greater than zero) is required for both projects, which project is the better investment? (Check one answer.)
________________ Project A
________________ Project Z
________________ The projects are equally desirable
b. Use the table values below to find the net present value of the cash flows associated with Project A, discounted at 12%:
|
|
Periods
|
Present Value of 1 at 12%
|
1
|
0.8929
|
2
|
0.7972
|
3
|
0.7118
|
126. A company has a decision to make between two investment alternatives. The company requires a 10% return on investment. Predicted data is provided below:
|
Investment Y
|
Investment Z
|
Projected after-tax net income
|
$ 40,000
|
$ 42,000
|
Investment costs
|
$600,000
|
$675,000
|
Estimated life
|
6 years
|
6 years
|
The present value of an annuity for six years at 10% is 4.3553. This company uses straight-line depreciation.
Required:
a. Calculate the net present value for each investment.
b. Which investment should this company select? Explain.
127. A company has a decision to make between two investment alternatives. The company requires a 10% return on investment. Predicted data is provided below:
|
Investment Y
|
Investment Z
|
Projected after-tax net income
|
$ 40,000
|
$ 43,000
|
Investment costs
|
$600,000
|
$672,000
|
Estimated life
|
6 years
|
6 years
|
The present value of an annuity for six years at 10% is 4.3553. This company uses straight-line depreciation.
Required:
a. Calculate the net present value for each investment.
b. Calculate the profitability index for each investment.
c. Which investment should this company select? Explain.