#32:[Required| 15points Asswer in grid & show work on back of page Slumber Compa

Question

#32:[Required| 15points Asswer in grid & show work on back of page Slumber Compary is corskdering two mutwally exchaive investment altematives Its estiman weighted-average cost of capital, used as the discount rate foe capital budeeting parposes, 10%. Folowing is information "Sarding each of the two prpects: 101000 Reqgaved imeset ounlay scremental aftes-tas cash inflows year$50 000 $30,000 Esimaled peoject lde iin yeans Estimated salvage vlue (end of hte) SI 70000 Alemitive annual cash flows (after tax) $50,000$30,000 3.7909 3.7909 X Annuity actor - Present value of cash flows Initial investment 5189,340 $170,000 5113,721 100,000 Net Present Value (NPV) ??? ??? Accouning rate of returnm (ARR) Paybock period (in yrs) HINT-I gave you the Pv factors so there is no need for the tables from the book) Required (a) Compute the estimated net present value (NPV), accounting rate of b) Why do the two altematives differ under the other two non-discourted (c) What other metric is missing that wouid be helpful in picking the betle (ARR) and payback period of each project and determine which altem based solely on NPV, is more desirable. which alternative would you recommend, and why based on a complete the available data? aternstive?

Explanation / Answer

(A)

Compute NPV

PAyback Calculation

In the fourth year we recived total 170,000

so year 3 + some days of 4th year

=20,000*365/50,000

=146

So poayback period is 3 year and 146 days

In the fourth year we recived total 100,000

so year 3 + some days of 4th year

=10,000*365/30,000

=122

So poayback period is 3 year and 122days

As per NPV calculation we should select project A because it has higher NPV

2

If we do not discount the Cash flow then project B is Better because it has higher return

C)

The other metrics that is missing is IRR .With the help of IRR we could take the decesion . That poject will be selected which has higher IRR

Slumber compant Alternative 1 Alternative 2 Initial Investment 170,000 100,000 Estimated Aftertax Cash flow 50,000 30,000 PV factor for 5 year 3.7909 3.7909 PV of cash Flow 189545 113727 Prasent Value
= PV of Cash Flow-initial Investment 19,545 13,727

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