1 Alpha, Inc. only has resources to run one capital project this year Consider t
ID: 2796624 • Letter: 1
Question
1 Alpha, Inc. only has resources to run one capital project this year Consider the following data and choose which of the four projects should be a NPV IRR Payback 18 months Project W $100 million $100 million 15% Project X $150 million $100 million 14% 17 months Project Y $75 million $85 million 18% 12 months Which project should be approved? A Project W B Project X C Project Y D Projectz 2 BetaCo is purchasing a piece of equipment for $300,000. There are delivery cos installation costs of $30,000 and the use of the equipment will require employee S50,000 as well as an inventory of special lubricants costing $25,000. Their tax machine will be depreciated using straightline depreciation over 10 years. What investment for this capital project? A 300,000 B 350,000 C 375,000 D 425,000Explanation / Answer
1.
Project Y should be approved.
There are three evaluations – NPV, IRR, and payback.
Net present value (NPV) is the difference of present value of cash inflows and the initial investment. NPV that greater than the initial investment is always desired.
Internal rate of return (IRR) is the rate of return at which NPV is 0. Higher IRR is always desired.
Payback period is the number of months required for covering the initial investment. Smaller payback period is always desired, since it indicates quicker recovery.
Project Y fulfils all these criteria; only this project has NPV ($85 million) that is greater than Io, it has the highest IRR (18%) compare to W and X, and the payback period is the smallest (12 months). Therefore, Y should be selected.
Answer: C
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