Quick Flick is considering two investments. Both require a net investment of $12
ID: 2389152 • Letter: Q
Question
Quick Flick is considering two investments. Both require a net investment of $120,000 and have the following net cash flows:Year Project X Project Y
1 $50,000 $25,000
2 40,000 45,000
3 30,000 50,000
4 25,000 60,000
5 20,000 70,000
Quick uses a combination of the net present value approach and the payback approach to evaluate investment alternatives. The firm uses a discount rate of 14 percent and requires that all projects have a payback period no longer than 3 years. Which investment or investments should Quick accept?
Explanation / Answer
Project X NPV = -$120,000 + $50,000/1.14 + 40,000/1.14^2 + 30,000/1.14^3 + 25,000/1.14^4 + 20,000/1.14^5 = $76.87596913 Amount recovered in 3 years = $50,000+ 40,000 + 30,000 = $120,000 Project Y NPV = -$120,000 + $25,000/1.14 + 45,000/1.14^2 + 50,000/1.14^3 + 60,000/1.14^4 + 70,000/1.14^5 = $42185.0623 Amount recovered in 3 years = $25,000 + 45,000 + 50,000 = $120,000 Quick should accept Project Y
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.