Labeau Products, Ltd., of Perth, Australia, has $14,000 to invest. The company i

Question

Labeau Products, Ltd., of Perth, Australia, has $14,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: Invest in Invest in Project X Project Y $14,000$14,000 Investment required Annual cash inflows Single cash inflow at the end of 6 years Life of the project $ 5,000 $35,000 years 6 years 6 The company's discount rate is 18%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using discount factors) using

Explanation / Answer

Ans

a.

b. Project X is best for the company.

Project X Now 1 2 3 4 5 6 Initial Investment ($) 14000 Annual cash flow($) -14000 5000 5000 5000 5000 5000 5000 Total cash flow ($) -14000 5000 5000 5000 5000 5000 5000 Discount factor @18% 1 0.847 0.718 0.609 0.516 0.437 0.37 Present value ($) -14000 4235 3590 3045 2580 2185 1850 Net Present value 3485 Project Y Now 6 Initial Investment ($) 14000 Annual cash flow($) -14000 35000 Total cash flow ($) -14000 35000 Discount factor @18% 1 0.37 Present value ($) -14000 12950 Net Present value -1050

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