Interstate Appliance Inc. is considering the following 3 mutually exclusive proj
ID: 2653229 • Letter: I
Question
Interstate Appliance Inc. is considering the following 3 mutually exclusive projects. Projected cash flows for these ventures are as follows:
Plan A Plan B Plan C
Initial Initial Initial
Outlay=$3,600,000 Outlay=$6,000,000 Outlay=$3,500,000
Cash Flow: Cash Flow: Cash Flow:
Yr 1=$ -0- Yr 1=$4,000,000 Yr 1=$2,000,000
Yr 2= -0- Yr 2= 3,000,000 Yr 2= -0-
Yr 3= -0- Yr 3= 2,000,000 Yr 3=2,000,000
Yr 4= -0- Yr 4= -0- Yr 4=2,000,000
Yr 5=$7,000,000 Yr 5= -0- Yr 5=2,000,000
If Interstate Appliance has a 12% cost of capital, what decision should be made regarding the projects above?
accept plan A
accept plan B
accept plan C
accept Plans A, B and C
accept plan A
accept plan B
accept plan C
accept Plans A, B and C
Explanation / Answer
Statement showing calculation of NPV Plan A Particulars Time PVF@12% Amount PV(Amount *PVF) Cash Outflows - 1.0000 (3,600,000.000) (3,600,000.00) PV of Cash Outflows (3,600,000.00) Cash Inflows 1.000 0.8929 - Cash Inflows 2.000 0.7972 - Cash Inflows 3.000 0.7118 - Cash Inflows 4.000 0.6355 - Cash Inflows 5.000 0.5674 7,000,000.000 3,971,987.99 PV of Cash Inflows 3,971,987.99 NPV 371,987.99 Statement showing calculation of NPV Plan B Particulars Time PVF@12% Amount PV(Amount *PVF) Cash Outflows - 1.0000 (6,000,000.000) (6,000,000.00) PV of Cash Outflows (6,000,000.00) Cash Inflows 1.000 0.8929 4,000,000.000 3,571,428.57 Cash Inflows 2.000 0.7972 3,000,000.000 2,391,581.63 Cash Inflows 3.000 0.7118 2,000,000.000 1,423,560.50 Cash Inflows 4.000 0.6355 - - Cash Inflows 4.000 0.5674 - - PV of Cash Inflows 7,386,570.70 NPV 1,386,570.70 Statement showing calculation of NPV Plan C Particulars Time PVF@12% Amount PV(Amount *PVF) Cash Outflows - 1.0000 (3,500,000.000) (3,500,000.00) PV of Cash Outflows (3,500,000.00) Cash Inflows 1.000 0.8929 2,000,000.000 1,785,714.29 Cash Inflows 2.000 0.7972 - Cash Inflows 3.000 0.7118 2,000,000.000 1,423,560.50 Cash Inflows 4.000 0.6355 2,000,000.000 1,271,036.16 Cash Inflows 4.000 0.5674 2,000,000.000 1,134,853.71 PV of Cash Inflows 5,615,164.65 NPV 2,115,164.65 Company should undertake Plan C since it has highest NPV and projects are mutually exclsuive which means acceptance of Plan C result in rejection of Plan A and Plan B
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