Diaz Camera Company is considering two investments, both of which cost $16,000.
ID: 2705218 • Letter: D
Question
Diaz Camera Company is considering two investments, both of which cost $16,000. The cash flows are as follows:
Use Appendix B.
Year
Project A
Project B
1
$
6,000
$
5,000
2
8,000
7,000
3
6,000
11,000
(a-1)
Calculate the payback period for project A and project B. (Round your answers to 2 decimal places.)
Payback period
Project A
years
Project B
years
(a-2)
Which of the two projects should be chosen based on the payback method?
Project A
Project B
(b-1)
Calculate the net present value for project A and project B. Assume a cost of capital of 9 percent. (Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Net present value
Project A
$
Project B
$
(b-2)
Which of the two projects should be chosen based on the net present value method?
Project B
Project A
(c)
Should a firm normally have more confidence in answer derived based on Net present value method or Payback method?
Payback method
Net present value method
Diaz Camera Company is considering two investments, both of which cost $16,000. The cash flows are as follows:
Use Appendix B.
Diaz Camera Company is considering two investments, both of which cost $16,000. The cash flows are as follows: Calculate the payback period for project A and project B. (Round your answers to 2 decimal places.) Which of the two projects should be chosen based on the payback method? Calculate the net present value for project A and project B. Assume a cost of capital of 9 percent. (Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.) Which of the two projects should be chosen based on the net present value method? Should a firm normally have more confidence in answer derived based on Net present value method or Payback method?Explanation / Answer
Payback period,
Peoject A
2+(16000-14000)/6000 = 2.33 years
Project B
2+(16000-12000)/11000 = 2.36 years
Project A will be chosen on the basis of Payback period.
B)
project A
NPV = -16000+(6000/1.09)+(8000/1.09^2)+(6000/1.09^3) = $871.127
project B
NPV = -16000+(5000/1.09)+(7000/1.09^2)+(11000/1.09^3) = $2972.93
Project B should be chosen on the basis of NPV
C)
NPV method,
because payback method do not consider future cash flow,
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