Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The following information relates to three possible capital expenditure projects.  Because of capital rationing only one project can be accepted.

 

Project A

Project B

Project C

Initial Cost

$230,000

$250,000

$190,000

Expected life

5years

5 years

4 years

Scrap value expected

$10,000

$15,000

$10,000

Expected Cash Inflows:

$

$

$

End Year 1

85,000

95,000

45,000

End Year 2

70,000

70,000

65,000

End Year 3

65,000

55,000

95,000

End Year 4

60,000

50,000

100,000

End Year 5

50,000

50,000

 

The company estimates cost of capital is 18%.  The table below shows the present value of $1 at 14%, 18% and 22%.

Periods

14%

18%

22%

1

0.877

0.847

0.820

2

0.769

0.718

0.672

3

0.675

0.609

0.551

4

0.592

0.516

0.451

5

0.519

0.437

0.370

6

0.456

0.370

0.303

Required:

Calculate:

  • The payback period for each project
  • The accounting rate of return for each project
  • The net present value for each project
  • The internal rate of return
  • Which project should be accepted – give reasons.
  • Explain the factors that management would need to consider in addition to the financial factors before making a final decision on a project.
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