Compare the following two alternatives by the IRR method, given MARR of 6%/year. First find if theyare feasible and then compare them with the incremental rate of return (AROR).Alt.Construction cost $Benefits $/yr Salvage $Service Life (yrs)A410,00055,00020,00011B250,00035,00010,00011

The internal rate of return (IRR) is a discounted cash flow method for calculating the rate of…

Answered: Compare the following two alternatives…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 9PA: Pitt Company is considering two alternative investments. The company requires a 12% return from its...

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Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
Gardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Assume Home Garden Inc. in MAD 26-5 assigns the following probabilities to the estimated construction cost of the warehouse and annual net cash flows: a. Compute the expected value of the construction cost. b. Compute the expected value of the annual net cash flows. c. Determine the expected net present value of building the distribution warehouse, assuming a desired rate of return of 14% and using the expected values computed in parts (a) and (b). Use the present value tables provided in Appendix A. Round to the nearest dollar. d. Based on your results in part (c), should Home Garden Inc. build the distribution warehouse?
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
Mason, Inc., is considering the purchase of a patent that has a cost of $85000 and an estimated revenue producing lite of 4 years. Mason has a required rate of return that is 12% and a cost of capital of 11%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
In an unrelated analysis, you have the opportunity to choose between the following two mutually exclusive projects, Project T (which lasts for 2 years) and Project F (which lasts for 4 years): The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 10% cost of capital. (1) What is each projects initial NPV without replication? (2) What is each projects equivalent annual annuity? (3) Apply the replacement chain approach to determine the projects extended NPVs. Which project should be chosen? (4) Assume that the cost to replicate Project T in 2 years will increase to 105,000 due to inflation. How should the analysis be handled now, and which project should be chosen?
Caduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.
Your company is planning to purchase a new log splitter for is lawn and garden business. The new splitter has an initial investment of $180,000. It is expected to generate $25,000 of annual cash flows, provide incremental cash revenues of $150,000, and incur incremental cash expenses of $100,000 annually. What is the payback period and accounting rate of return (ARR)?
Pitt Company is considering two alternative investments. The company requires a 12% return from its investments. Neither option has a salvage value. Compute the IRR for both projects and recommend one of them. For further instructions on internal rate of return in Excel, see Appendix C.
Compare the following alternatives based on the rate of return analysis assuming that the MAAR is 15% per year. Project A Project B Initial Cost $60.000 $90.000 Annual cost of operation 15.000 8.000 Annual cost of reparation 5.000 2.000 Annual increase of the repair 1.000 1.500 Salvage value 8.000 12.000 Life, years 15 15
Use the following alternatives to develop an incremental analysis choice table and answer the following questions. Alternative A Initial Cost - $15,000 Annual Revenue (Year 1-15) - $2500 Salvage Benefit (Year 15) - $2000 Alternative B Initial Cost - $25,000 Annual Revenue (Year 1-15) - $3500 Salvage Benefit (Year 15) - $5000 1. Determine the incremental rate of return IRRHigh-Low. Provide your answer as a percentage and round to the nearest hundredth. 2. Determine the internal rate of return for the higher cost alternative IRRHigh. Provide your answer as a percentage and round to the nearest hundredth. 3. Determine the internal rate of return for the lower cost alternative IRRLow. Provide your answer as a percentage and round to the nearest hundredth. Please answer all 3.

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