Tensaw Chemical plans to invest $200,000 and has identified the following three

Question

Tensaw Chemical plans to invest $200,000 and has identified the following three investments. Investment A requires an initial investment of $ 120,000 and has an annual rate of return of 18%. Investment B an initial investment of $80,000 and has an annual rate of return of 22%. Investment C requires an initial investment of $20,000 and has an annual rate of return of 35%. Any unused funds require deposit in a bank account with an annual percentage yield of 6%. Tensaw Chemical may invest in each of the investments only once. All of the investments have a one-year life. Using rate of return analysis determine which alternative Tensaw Chemical should choose.

Explanation / Answer

IN MILLIONS INITIAL COST 35 COST IN 3RD YR 8 SALVAGE 24 PROJECT LIFE 7 REVENUE 9 MARR 12% REVENUE EXPENSE CF PVF @12% 0 -35 1 -35 1 9 1 8 0.892857 7.142857 2 8.82 1.03 -0.4173 0.797194 -0.33267 3 8.6436 1.0609 7.5827 0.71178 5.397216 4 8.470728 1.092727 7.378001 0.635518 4.688853 5 8.30131344 1.125509 7.175805 0.567427 4.071744 6 8.135287171 1.159274 6.976013 0.506631 3.534265 7 7.972581428 1.194052 6.778529 0.452349 3.066262 NPW -7.43147 NPW OF THE PROJECT IS NEGATIVE AND THUS REJECTED.

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