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Batelco Inc. is considering two mutually exclusive projects A and B. Each project requires an initial investment as presented in the below table. The economic life of the project A will be 6-Year's and Project B will be 5 years, and both projects carry same risk, Batelco Inc uses a discount rate of 12%. After considering the current economic situation Batelco Inc. has set a maximum payback period of 4 years and minimum return on investment (ROI) 18%. A financial analyst, prepared estimates of the annual revenues and costs associated with each project as in the below table: Cost of equipment Working Capital needed Overhaul of the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs Life of Project Projects A 240.000 60,000 12000 375,000 180.000 60.000 90,000 6 year Projects B 470.000 80,000 14000 300,000 90,000 74,000 70,000 5 years The working capital will be released 6th and 5th year of the project A and project B respectively, for investment elsewhere within the company. Required: 1. Calculate the net present value for each project. 2. Calculate the simple rate of return for each product... 3. Which of the two projects (if either) would you recommend that Batelco Inc. accept? Why?

Batelco Inc. is considering two mutually exclusive projects A and B. Each project requires an initial investment as presented in the below table. The economic life of the project A will be 6-Year's and Project B will be 5 years, and both projects carry same risk, Batelco Inc uses a discount rate of 12%. After considering the current economic situation Batelco Inc. has set a maximum payback period of 4 years and minimum return on investment (ROI) 18%. A financial analyst, prepared estimates of the annual revenues and costs associated with each project as in the below table: Cost of equipment Working Capital needed Overhaul of the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs Life of Project Projects A 240.000 60,000 12000 375,000 180.000 60.000 90,000 6 year Projects B 470.000 80,000 14000 300,000 90,000 74,000 70,000 5 years The working capital will be released 6th and 5th year of the project A and project B respectively, for investment elsewhere within the company. Required: 1. Calculate the net present value for each project. 2. Calculate the simple rate of return for each product... 3. Which of the two projects (if either) would you recommend that Batelco Inc. accept? Why?

Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter5: Investment Decisions: Look Ahead And Reason Back
Section: Chapter Questions
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Batelco Inc. is considering two mutually exclusive projects A and B. Each project requires an initial investment as presented in the below table. The economic life of the project A will be 6-Year's and Project B will be 5 years, and both projects carry same risk, Batelco Inc uses a discount rate of 12%. After considering the current economic situation Batelco Inc. has set a maximum payback period of 4 years and minimum return on investment (ROI) 18%. A financial analyst, prepared estimates of the annual revenues and costs associated with each project as in the below table: Cost of equipment Working Capital needed Overhaul of the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs Life of Project Projects A 240.000 60,000 12000 375,000 180.000 60.000 90,000 6 year Projects B 470.000 80,000 14000 300,000 90,000 74,000 70,000 5 years The working capital will be released 6th and 5th year of the project A and project B respectively, for investment elsewhere within the company. Required: 1. Calculate the net present value for each project. 2. Calculate the simple rate of return for each product... 3. Which of the two projects (if either) would you recommend that Batelco Inc. accept? Why??
Transcribed Image Text:Batelco Inc. is considering two mutually exclusive projects A and B. Each project requires an initial investment as presented in the below table. The economic life of the project A will be 6-Year's and Project B will be 5 years, and both projects carry same risk, Batelco Inc uses a discount rate of 12%. After considering the current economic situation Batelco Inc. has set a maximum payback period of 4 years and minimum return on investment (ROI) 18%. A financial analyst, prepared estimates of the annual revenues and costs associated with each project as in the below table: Cost of equipment Working Capital needed Overhaul of the equipment in two years Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs Life of Project Projects A 240.000 60,000 12000 375,000 180.000 60.000 90,000 6 year Projects B 470.000 80,000 14000 300,000 90,000 74,000 70,000 5 years The working capital will be released 6th and 5th year of the project A and project B respectively, for investment elsewhere within the company. Required: 1. Calculate the net present value for each project. 2. Calculate the simple rate of return for each product... 3. Which of the two projects (if either) would you recommend that Batelco Inc. accept? Why??
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