The two alternatives carry equal risk and should be evaluated at the company\'s
ID: 2716035 • Letter: T
Question
The two alternatives carry equal risk and should be evaluated at the company's cost of capital. The cost for the new smoker line will be $7,000,000. Also, the company has been guaranteed a buyer for the new line at the end of the fifth year. The buyer has agreed to purchase the new line for $7,900,000. The outdoor grill alternative will cost $3,987,000 and also has a guaranteed buyer, who has agreed to pay $4,000,000 at the end of the fifth year.
Investment B
Investment B involves two independent investment opportunities. The decisions on these two investment alternatives are also independent of Investment A. Investment B-1 involves a new packaging machine, which will eliminate the need for a local firm for packaging Vanda-Laye's products. The cost of this machine will be $24,000, and the expected revenues from this opportunity are given in the table and are considered to be of average risk. Investment B-2 is the purchase of a new computer system that will allow the company to sell its products on the Internet worldwide. The cost of this new system will be $29,000, with the expected cash flows after taxes given in the table.
For Investment B:
Using Microsoft Excel, calculate the NPV for each alternative.
Using the decision-making criteria for the NPV, specify which alternative you would select if the two alternatives were mutually exclusive. Explain your answer.
Given that the two alternatives are independent of each other, specify which investment you would select, if not both. Explain your answer.
Using Microsoft Excel, calculate the IRR for each investment.
Using the decision-making criteria for the IRR, specify which alternative you would prefer. Explain your answer.
If funding were available, specify whether you would select both investments. Why or why not?
Calculate the profitability index (PI) for the two investments. Which project is preferred?
Determine whether there is a ranking conflict present in terms of the IRR and the NPV. Explain your answer. If a conflict does exist, explain how you would resolve the situation.
Year
Cash Flows
Packaging Machine
Computer System
1
$8,400
$9,100
2
$4,800
$8,800
3
$7,800
$8,300
4
$6,200
$8,000
5
$5,500
$5,100
6
$4,600
$4,000
7
$3,000
$3,500
Year
Cash Flows
Packaging Machine
Computer System
1
$8,400
$9,100
2
$4,800
$8,800
3
$7,800
$8,300
4
$6,200
$8,000
5
$5,500
$5,100
6
$4,600
$4,000
7
$3,000
$3,500
Explanation / Answer
Answer 1: NPV Tabale
Answer- 2 Project B- 2 will be select on the basis of NPV. Its NPV is quite better from Project - B1.
Answer - 3 Project B- 2 will be select on the basis of NPV. Its NPV is quite better from Project - B1.
Answer - 4 IRR
For Project B-1
NPV of Project B-1 is apprxo Zero at 17%. Hence its IRR is 17%
For Project B-2
NPV of Project B-2 is apprxo Zero at 17%. Hence its IRR is 17%
Answer -5 Both project have IRR. On the basis of IRR any project could be selected. It is depend ochoice.
Answer - 6 If funding are available both project can be accepted. Because Both project have same IRR.
Answer -7
Profiatability Index of Project - B1 = Total present value of cash inflow/ Total present value of cash outflow
= 29241.70/24000
= 1.2184 = 121.84
Profiatability Index of Project - B 2 = Total present value of cash inflow/ Total present value of cash outflow
= 34456.60/29000
= 1.1881 = 118.81
Answer -8 NPV & IRR of Both project is apprx same. there is not any confilct of interest. There is no big diff erence in NPV or IRR evalution of Both project. Any project can be accepted on the basis of NPV or IRR.
= 1.2184 = 121.84
Year Cash inflow B-1 PV @ 10% PV of cash inflow B-1 Cash inflow B-2 PV @10% PV of cash inflow B-2 1 8400 0.909 7635.60 9100 0.909 8271.90 2 4800 0.826 3964.80 8800 0.826 7268.80 3 7800 0.751 5857.80 8300 0.751 6233.30 4 6200 0.683 4234.60 8000 0.683 5464.00 5 5500 0.621 3415.50 5100 0.621 3167.10 6 4600 0.564 2594.40 4000 0.564 2256.00 7 3000 0.513 1539.00 3500 0.513 1795.50 Total 29241.70 34456.60 Less Intitial Investment 24000.00 29000.00 Net Profit 5241.70 5456.60Related Questions
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