10. You are also considering another project with a physical life of 3 years; that is, themachinery will be worn out after 3 years. However, if the project were terminated before theend of 3 years, the machinery would have a positive salvage value. Here are the project’sestimated cash flows: Yr CF Salvage0 ($850,000) $850,0001 375,000 675,0002 425,000 325,0003 384,000 0 Using the 12% cost of capital, what is the project’s NPV if it is operated for the full 3years? Would the NPV change if the company planned to terminate the project at theend of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?
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10. You are also considering another project with a physical life of 3 years; that is, the
machinery will be worn out after 3 years. However, if the project were terminated before the
end of 3 years, the machinery would have a positive salvage value. Here are the project’s
estimated cash flows:
Yr CF Salvage
0 ($850,000) $850,00
0
1 375,000 675,000
2 425,000 325,000
3 384,000 0
Using the 12% cost of capital, what is the project’s NPV if it is operated for the full 3
years? Would the NPV change if the company planned to terminate the project at the
end of Year 2? At the end of Year 1? What is the project’s optimal (economic) life?
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- Giant Machinery Ltd is considering to invest in one of the two following Projects to buy a new equipment. Each project 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. Project 1 Project 2 Cost $175,000 $185,000 Future Cash Flows Year 1Year 2Year 3Year 4 Year 5 76,00083,00067,00065,000 55,000 87,00078,00069,00065,000 57,000 Required:a) Identify which project should the company accept based on NPV method. (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification)b) Identify which project should the company accept based on simple pay back method if the payback criteria is maximum 2 years. c) Which project Giant Machinery should choose if two methods are in conflict.Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company's required rate of return for all investment projects is 89%. The cash flows of the projects are provided below. Equipment 1 Equipment 2 Cost $186,000 S195,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 86 000 93 000 83 000 75 000 55 000 97 000 84 000 86 000 75 000 63 000 Required: a) Identify which option of eauipment should the company accept based on Profitability Index? (.. b) Identify which option of equipment should the company accept based on discounted pay back method if the payback criterion is maximum 2 years?Bunnings Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided below.Equipment 1 Equipment 2Cost $186,000 $195,000Future Cash FlowsYear 1Year 2Year 3Year 4Year 586 00093 00083 00075 00055 00097 00084 00086 00075 00063 000Identify which option of equipment should the company accept based ondiscounted pay back method if the payback criterion is maximum 2 years?
- Machinery Ltd is considering to invest in one of the two following Projects to buy a newequipment. Each project will last 5 years and have no salvage value at the end. The company’s requiredrate of return for all investment projects is 9%. The cash flows of the projects are provided below.Project 1 Project 2Cost $175,000 $185,000Future Cash FlowsYear 1Year 2Year 3Year 4Year 576,00083,00067,00065,00055,00087,00078,00069,00065,00057,000Which project Machinery should choose if two methods are in conflictMachinery Ltd is considering to invest in one of the two following Projects to buy a newequipment. Each project will last 5 years and have no salvage value at the end. The company’s requiredrate of return for all investment projects is 9%. The cash flows of the projects are provided below.Project 1 Project 2Cost $175,000 $185,000Future Cash FlowsYear 1Year 2Year 3Year 4Year 576,00083,00067,00065,00055,00087,00078,00069,00065,00057,000Required:a) Identify which project should the company accept based on NPV method.Machinery Ltd is considering to invest in one of the two following Projects to buy a newequipment. Each project will last 5 years and have no salvage value at the end. The company’s requiredrate of return for all investment projects is 9%. The cash flows of the projects are provided below.Project 1 Project 2Cost $175,000 $185,000Future Cash FlowsYear 1Year 2Year 3Year 4Year 576,00083,00067,00065,00055,00087,00078,00069,00065,00057,000Identify which project should the company accept based on simple pay back method if thepayback criteria is maximum 2 years.
- Consider the following project with a 4-year life. If terminated prior to 4 years, the equipment used will have a positive salvage value. Cash flows from the project and salvage values at various stages are shown in the table below. Choose the optimal operating life of the project. Assume a WACC of 10%. Year Cash Flow Salvage Value 0 -5,000 4,500 1 3,200 3,375 2 2,200 2,250 3 1,500 1,125 4 900 0 1 year O years 3 years 2 years 4 yearsBunnings Ltd is considering to invest in one of the two following projects to buy new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided below. Equipment 1 Equipment 2Cost $186,000 $195,000Future Cash FlowsYear 1 86000 97000Year 2 93000 84000Year 3 83000 86000Year 4 75000 75000Year 5 55000 63000 Identify which option of equipment should the…Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $ 22,660. Each project will last for 3 years and produce the following net annual cash flows. Year AA BB CC 1 $7,210 $ 10,300 $ 13,390 9,270 10,300 12,360 3 12,360 10,300 11,330 Total $ 28,840 $ 30,900 $ 37,080 The equipment's salvage value is zero, and Doug uses straight-line depreciation. Doug will not accept any project with a cash payback period over 2 years. Doug's required rate of return is 12%. Click here to view the factor table. (a) Compute each project's payback period. (Round answers to 2 decimal places, e.g. 15.25.) AA years BB years CC years Which is the most desirable project? The most desirable project based on payback period is Which is the least desirable project? The least desirable project based on payback period is (b) Compute the net present value of each project. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or…
- Giant Machinery Ltd is considering to invest in one of the two following Projects to buy a new equipment. Each project 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. Project 1 Project 2Cost $175,000 $185,000Future Cash FlowsYear 1 76,000 83,000Year 2 67,000 65,000Year 3 55,000 87,000Year 4 78,000 69,000Year 5 65,000 57,000Required:a) Identify which project should the company accept based on NPV method. (Note: Please round up the result of each calculation of PV to 2…Big Bang Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided below. Equipment 1 Equipment 2 Cost $186,000 $195,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 86 000 93 000 83 000 75 000 55 000 97 000 84 000 86 000 75 000 63 000 Big Bang’s net income in current year is $450,000. The company maintains a capital structure of 55% in equity funding and 45% in debt funding. Required: 1) Identify which option of equipment should the company accept based on NPV method. (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) 2) Identify which option of equipment should the company accept based on Profitability Index method. 3) Which equipment option should the company finally…Big Bang Ltd is considering to invest in one of the two following projects to buy a new equipment. Each equipment will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 8%. The cash flows of the projects are provided below. Equipment 1 Equipment 2 Cost $186,000 $195,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 86 000 93 000 83 000 75 000 55 000 97 000 84 000 86 000 75 000 63 000 Big Bang’s net income in current year is $450,000. The company maintains a capital structure of 55% in equity funding and 45% in debt funding. Required: Identify which option of equipment should the company accept based on NPV method. (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification) Identify which option of equipment should the company accept based on Profitability Index method. Which equipment option should the company finally choose…
