TEST 2 430 Read-Onlyl-Wond w View ACROBAT Tel wht you want to QUESTION 15 A comp

Question

TEST 2 430 Read-Onlyl-Wond w View ACROBAT Tel wht you want to QUESTION 15 A company is considering two average-risk alternative ways of producing a product. Process A has a cost of $8,500 and will produce net cash flows of $5,000 per year for 2 years. Process B will cost $11,500 and will produce cash flows of $4,000 per year for 4 years. The company can extend cach of the two alternatives as needed. The cash inflows occur at the end of each year, and this company's cost of capital is 9 percent. 1. The company will use the replacement chain approach to evaluate the project, the NPV of the better project? 2360.42 DELL

Explanation / Answer

NPV OF BETTER PROCESS - B = 1458.88

Explanation

For process - A with 2 years life, investment is repeated at the end of 2nd year. Hence 5000 annual cash in flow minus 8500 cash outflow = - 3500 cash outlay is marked at the end of 2nd year.

DF = Discounting factors at 9%

PV = Present value obtained by multiplication of DF with CF ( Cash flows)

Year DF       Process - A       Process - B CF PV CF PV 0 1 -8500 -8500 -11500 -11500 1 0.91743 5000 4587.2 4000 3669.725 2 0.84168 -3500 -2945.9 4000 3366.72 3 0.77218 5000 3860.9 4000 3088.734 4 0.70843 5000 3542.1 4000 2833.701 NPV(A) 544.32 NPV(B) 1458.88

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