The Sander\'s Electric Company is evaluating two projects for possible inclusion
ID: 2623387 • Letter: T
Question
The Sander's Electric Company is evaluating two projects for possible inclusion in the firm's capital budget. Project M will requrie a $37,000 investment while project O's investment will Be $46,000. After-tax cash inflows are estimated as follows for the two projects:
Year Project M Project O
1 $12,000 $10,000
2 12,000 10,000
3 12,000 15,000
4 12,000 15,000
5 15,000
Determine the payback period for each project.
Payback (M) = $37,000/xx,xxx= x.xx years
Payback (O) = x years + 11,000/15,000 = x.xx years
Calculate the net present value and profitability index for each project based on a 10 percent cost of capital. Which, if either, of the projects is acceptable?
NPV (M) = xx,xxx PVIFA ________xx,000 = $12,000 3.170 37,000
= $x,xxx
PI(M) = $38,040/xx,000 = x.xxx
NPV(O) = $10,000 PVIFA _________ + 5,000 (PVIF(10%,3)
+ PVIF(10%,4) + PVIF(10%,5)) xx,xxx
= 10,000 3.791 + 5,000(.751 + .683 + .621) xx,xxx
= $48,185 46,000 = $2,185
PI(O) = 48,185/xx,000 = x.xxx
Both projects have positive NPVs, so both are acceptable.
c. Determine the internal rate of return and modified internal rate of return for Projects M and O.
USE Formulas in Text
Explanation / Answer
Determine the payback period for each project.
Payback (M) = $37,000/12,000= 3.08 years
Payback (O) = 3 years + 11,000/15,000 = 3.73 years
Calculate the net present value and profitability index for each project based on a 10 percent cost of capital. Which, if either, of the projects is acceptable?
NPV (M) = 12,000
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