ABC management is looking at two possible projects. Project X has an initial cos
ID: 2625204 • Letter: A
Question
ABC management is looking at two possible projects. Project X has an initial cost of $100,000 and requires additional capital expenditures at the end of year 1 and year 2 each of $10,000. Project Q has an initial cost of $50,000 and requires additional capital expenditures at the end of each year 1, 2, and 3 of $25,000. The projected cash inflows of each project are set forth below:
X
Q
Year
1
0
10,000
2
15,000
20,000
3
30,000
30,000
4
60,000
40,000
5
60,000
50,000
The ongoing value of Project X (valued in year 6) is $140,000; the ongoing value of Project Q (valued in year 6) is $120,000.
a.What are the payback periods respectively for Project X and Project Q?
b.Assuming a discount rate of 10% applies to each project, what is the respective NPV for each?
X
Q
Year
1
0
10,000
2
15,000
20,000
3
30,000
30,000
4
60,000
40,000
5
60,000
50,000
Explanation / Answer
CASHFLOWs:-
Year
X
Cumulative -X
Q
Cumulative-Q
0
-100000
-100000
-50000
-50000
1
(0
CASHFLOWs:-
Year
X
Cumulative -X
Q
Cumulative-Q
0
-100000
-100000
-50000
-50000
1
(0
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