Chapter 11: Questions 3 - 8 3. Tremaine Company is considering two mutually excl

Question

Chapter 11: Questions 3 - 8

3.  Tremaine Company is considering two mutually exclusive long-term investment projects. Project ABC would require an investment of $240,000, have a useful life of 4 years, and annual cash flows of $78,000. Project XYZ would require an investment of $230,000, have a useful life of 5 years, and annual cash flows of $66,000. Cost of capital is 12 percent.   

3 value 12.50 points Tremaine Company is considering two mutually exclusive long-term investment projects. Project ABC would require an investment of $240,000, have a useful life of 4 years, and annual cash flows of $78,000. Project XYZ would require an investment of $230,000, have a useful life of 5 years, and annual cash flows of $66,000. Cost of capital is 12 percent. Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate Calculate NPV. (Future Value of $1, factor(s) from the tables provided. Round your "Future Cash Flow" values to the nearest whole dollar amounts. Negative amounts should be indicated by a minus sign.) Project ABC Table or Calculator Function: Cash Inflow n= Table Factor Future Cash Flow Original Investment NPV of Project ABC Project XYZ Table or calculator function: Cash Inflow n= Table Factor Future Cash Flow Original Investment NPV of Project XYZ Which project do you recommend? O Project ABC Project XYZ

Explanation / Answer

3 calculation of net present value project abc 1 cash inflow 78000 2 number of years 4 3 interest rate 12% 4 table factor 3.0373 5 future cash flow ( 1 * 4 ) 236909 6 original investment 240000 7 net present value of project abc ( 5 - 6 ) -3091 project xyz 1 cash inflow 66000 2 number of years 5 3 interest rate 12% 4 table factor 3.6048 5 future cash flow ( 1 * 4 ) 237917 6 original investment 230000 7 net present value of project abc ( 5 - 6 ) 7917 project xyz will be recommended as the net present value is positive

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