New Age Ltd is considering investing in one of the two following projects to buy a new assembly line. Each option will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9%. The cash flows of the projects are provided below. Assembly Line 1 Assembly Line 2 Cost $386,000 $425,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 136 000 213 000 283 000 215 000 175 000 197 000 184 000 186 000 265 000 263 000 Required: Identify which option of assembly line the company should accept based on the NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) Identify which option of assembly line the company should accept based on the Profitability Index method.
New Age Ltd is considering investing in one of the two following projects to buy a new assembly line. Each option will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9%. The cash flows of the projects are provided below. Assembly Line 1 Assembly Line 2 Cost $386,000 $425,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 136 000 213 000 283 000 215 000 175 000 197 000 184 000 186 000 265 000 263 000 Required: Identify which option of assembly line the company should accept based on the NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) Identify which option of assembly line the company should accept based on the Profitability Index method.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter26: Real Options
Section: Chapter Questions
Problem 9SP
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New Age Ltd is considering investing in one of the two following projects to buy a new assembly line. Each option will last 5 years and have no salvage value at the end. The company’s required rate of
|
|
Assembly Line 1 |
Assembly Line 2 |
|
Cost |
$386,000 |
$425,000 |
|
Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 |
136 000 213 000 283 000 215 000 175 000 |
197 000 184 000 186 000 265 000 263 000 |
Required:
- Identify which option of assembly line the company should accept based on the
NPV method (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) - Identify which option of assembly line the company should accept based on the Profitability Index method.
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