Consider the following after-tax cash flows: n A B 0 -2500 -5000 1-6 2000 2500 7
ID: 2652498 • Letter: C
Question
Consider the following after-tax cash flows:
n A B
0 -2500 -5000
1-6 2000 2500
7 2000 0
MARR is 10% (compounded annually)
(a) Compute the future worths of the projects at the end of period 7.
(b) Assume that the required service period is seven years and that the company is considering a comparable equipment that has an annual lease expense of $10,000 for period seven (to be paid at the end of year 7), if project B is chosen. This will result in an income of $12,500 at the end of period 7. Which project is the better choice, using present worth as the criteria?
Explanation / Answer
a) Project A
Years Cash Flow Present Value Factor 10% Amount
0 -2500 1 (2500)
1-6 2000 4.355 8710
7 2000 0.513 1026
Future Worth of the project 7236
Project B
Years Cash Flow Present Value Factor 10% Amount
0 -5000 1 (5000)
1-6 2500 4.355 10887.5
Future Worth of the project 5887.5
b)Project B
Years Cash Flow Present Value Factor 10% Amount
0 -5000 1 (5000)
1-6 2500 4.355 10887.5
7 -10000 0.513 (5130)
7 12,500 0.513 6412.5
Present Worth of the project 7170
Project A is better.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.