1. Your company has been presented with an opportunity to invest in a project. T
ID: 2796979 • Letter: 1
Question
1. Your company has been presented with an opportunity to invest in a project. The facts on the project are presented below: $60,000 None Investment required Salvage value after 10 years Gross income expected from the project $20,000/year Operating costs Labor Materials, insurance, etc. Fuel and other costs Maintenance costs $2,500lyear $1,000/year $1,500/year ear This project is expected to operate as shown for 10 years. If your management expects to make 25% on its investment before taxes, would you recommend this project? 2. The winner of a sweepstakes prize is given the choice of one million dollars or the guaranteed amount of $81,000 a year for 20 years. If the value of money is taken at 12% interest rate, which choice is better? 3. Given the following three mutually exclusive alternatives, which alternative is preferable if 10%? Alternative Initial cost Annual benefits Useful life (years $50 15 $30 $40 10 35Explanation / Answer
Return on investment = Average Return / Average investment
Average return = 8500*10/10 = 8500
Average investment = (Initial investment + salvage value )/2
= (60000+0)/2
= 30000
Return on investment = 8500/30000
= 28.33
should invest in the project as it has 28.33% ROI which is more than required (25%).
2. Present value of 81000 after 20 years = 81000*7.469444 = 605025 or 1000000 just now
of course would choose 1000000 just now.
3. Calculation of present value of all cash flows -
will choose C project as it has higher NPV than other two (A & B).
Please note all values are in $.
Please comment in case of any query/clarification required.
Year 0 1 2 3 4 5 6 7 8 9 10 Initial investment 60000 Revenue 20000 20000 20000 20000 20000 20000 20000 20000 20000 20000 less operating cost 5500 5500 5500 5500 5500 5500 5500 5500 5500 5500 less Depriciation 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 EBIT 8500 8500 8500 8500 8500 8500 8500 8500 8500 8500Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.