the kitchen inc. is considering the following 3 mutually exclusive projects. pro
ID: 2625624 • Letter: T
Question
the kitchen inc. is considering the following 3 mutually exclusive projects. projected cash flows for these ventures are as follows; plan A initial outlat= $ 3,600,000 cash flow: yr1=$ -0- yr2=-0- yr3=-0- yr4=-0- yr5=$7,000,000 plan B initial outlay=$6,000,000 cash flow: yr1=$4,000,000 yr2=3,000,000 yr3= 2,000,000 yr4= -0- yr5= -0- plan C initial outlay=$3,500,000 cashflow: yr1=$ 2,000,000 yr2= -0- yr3= 2,000,000 yr4= 2,000,000 yr5= 2,000,000 if the kitchen has a 12% cost of capital, what decision should be made regarding the projects above? accept plan C accept plan A accept plan B accept plans A,B and C
Explanation / Answer
Answer :
In The books of Kitchen Inc
Caculation of Net Present Value:
Period
Value Factor
Plan A
Plan B
Plan C
1
0.893
0 (0*0.893)
3,57,200
(4,00,000*0.893)
1,78,600
(2,00,000*0.893)
2
0.797
0 (0*0.797)
2,39,100
(3,00,000*0.797)
0 (0*0.797)
3
0.712
0 (0*0.712)
1,42,400
(2,00,000*0.712)
1,42,400
(2,00,000*0.712
4
0.636
0 (0*0.636)
0 (0*0.636)
1,27,200
(2,00,000*0.636)
5
0.567
3,96,900
(7,00,000*0.567)
0 (0*0.567)
1,13,400
(2,00,000*0.567)
Present Value of cash flows
Total
3,96,900
7,38,700
5,61,600
Less: Initial Outlay
3,60,000
6,00,000
3,50,000
Net Present Value
36,900
1,38,700
2,11,600
Depending on the net present value, Plan C should be adopted by Kitchen Inc
The value factor is considered with respect to cost of capital i.e. 12%
Period
Value Factor
Plan A
Plan B
Plan C
1
0.893
0 (0*0.893)
3,57,200
(4,00,000*0.893)
1,78,600
(2,00,000*0.893)
2
0.797
0 (0*0.797)
2,39,100
(3,00,000*0.797)
0 (0*0.797)
3
0.712
0 (0*0.712)
1,42,400
(2,00,000*0.712)
1,42,400
(2,00,000*0.712
4
0.636
0 (0*0.636)
0 (0*0.636)
1,27,200
(2,00,000*0.636)
5
0.567
3,96,900
(7,00,000*0.567)
0 (0*0.567)
1,13,400
(2,00,000*0.567)
Present Value of cash flows
Total
3,96,900
7,38,700
5,61,600
Less: Initial Outlay
3,60,000
6,00,000
3,50,000
Net Present Value
36,900
1,38,700
2,11,600
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