Keller Construction is considering two new investments. Project E calls for the purchase of earth moving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B.
Project E Project H ($40,000 investment) ($36,000 investment) Year Cash flow Year Cash flow 1 $ 9,000 1 $ 17,000 2 14,000 2 15,000 3 20,000 3 13,000 4 22,000
(a) Determine the net present value of the projects based on a zero discount rate. (Omit the "$" sign in your response.) Net present value Project E $ Project H $
(b) Determine the net present value of the projects based on a 11 percent discount rate. (Round "PV Factors" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.) Net present value Project E $ Project H $
(d) If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 8 percent? (Use the net present value profile for your decision; no actual numbers are necessary.) Project E Project H Both H and E
Keller Construction is considering two new investments. Project E calls for the purchase of earth moving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B.
| Project E | Project H | |||||
| ($40,000 investment) | ($36,000 investment) | |||||
| Year | Cash flow | Year | Cash flow | |||
| 1 | $ 9,000 | 1 | $ 17,000 | |||
| 2 | 14,000 | 2 | 15,000 | |||
| 3 | 20,000 | 3 | 13,000 | |||
| 4 | 22,000 | |||||
(a) Determine the net present value of the projects based on a zero discount rate. (Omit the "$" sign in your response.) Net present value Project E $ Project H $
(b) Determine the net present value of the projects based on a 11 percent discount rate. (Round "PV Factors" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.) Net present value Project E $ Project H $
(d) If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 8 percent? (Use the net present value profile for your decision; no actual numbers are necessary.) Project E Project H Both H and E
Related questions
| X-treme Vitamin Company is considering two investments, both of which cost $44,000. The cash flows are as follows: |
| Year | Project A | Project B | ||||
| 1 | $ | 46,000 | $ | 38,000 | ||
| 2 | 17,000 | 18,000 | ||||
| 3 | 13,000 | 15,000 | ||||
| Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. |
| a-1. | Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal places.) |
| Payback Period | |
| Project A | year(s) |
| Project B | year(s) |
| a-2. | Which of the two projects should be chosen based on the payback method? | ||||
|
| b-1. | Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places.) |
| Net Present Value | |
| Project A | $ |
| Project B | $ |
| b-2. | Which of the two projects should be chosen based on the net present value method? | ||||
|
| c. | Should a firm normally have more confidence in the payback method or the net present value method? | ||||
|
Q6) Assume yourself as a financial analyst for the Great Land Company. Then, the director of capital budgeting asks you to analyse two proposed capital investments named Project A and Project B. Each project has a cost of 900,000 birr, and the cost of capital (the required rate of return) for each project is 10%. The information on the projects’ expected net cash flows are as follows with the present value of 1 birr at 10%.
|
Year |
Cash flow of the projects in Birr |
PV of 1birr at 10% |
|
|
Project A |
Project B |
||
|
0 |
- 900,000 |
- 900,000 |
1 |
|
1 |
400,000 |
245,000 |
0.909 |
|
2 |
350,000 |
245,000 |
0.826 |
|
3 |
250,000 |
245,000 |
0.751 |
|
4 |
150,000 |
245,000 |
0.683 |
|
5 |
100,000 |
245,000 |
0.621 |
Required:
- Calculate each project’s payback period (PBP) and determine which project is preferable as per PBP results. (2 pts)
- Calculate each project’s net present value (NPV). (2 Pts)
- Determine and justify which project or projects should be accepted as per NPV results if they are independent projects. (2Pts).
- Determine and justify which project or projects should be accepted as per NPV if they are mutually exclusive projects. (2Pts).
- Calculate the internal rate of return (IRR) for each project and determine whether the projects are accepted or rejected as per IRR result and also determine which project is preferable based on IRR. (2Pts)
- Discuss the relative strengths and limitations of the capital budgeting decision criteria that you have used above (Payback period, NPV and IRR).( 3Pts)
