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COST-BENEFIT ANALYSIS Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alternative. Round the cost projections to the nearest month. b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why? PROBLEM 7: CosT-BENEFIT AMALYSIS COST OF CAPITAL = .14 Probability Amount Probability Amount Project completion time 0.5 0.3 0.2 12 months 18 months 24 months 4 years 5 years 6 years $200,000 250,000 300,000 $ 75,000 95,000 105,000 0.6 12 months 0.2 18 months 0.1 24 months 4 years 5 years 6 years $210,000 250,000 260,000 $ 85,000 100,000 110,000 Expected useful ife 0.6 0.5 0.25 0.3 0.2 0.15 0.35 One-time costs 0.2 0.4 0.55 0.25 0.25 Recurring costs 0.1 0.4 0.55 0.35 0.4 0.2 Annual tangible benefits starting with weighted average completion date 0.3 0.5 0.2 $220,000 233,000 240,000 0.25 0.5 0.25 $215,000 225,000 235,000

COST-BENEFIT ANALYSIS Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alternative. Round the cost projections to the nearest month. b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why? PROBLEM 7: CosT-BENEFIT AMALYSIS COST OF CAPITAL = .14 Probability Amount Probability Amount Project completion time 0.5 0.3 0.2 12 months 18 months 24 months 4 years 5 years 6 years $200,000 250,000 300,000 $ 75,000 95,000 105,000 0.6 12 months 0.2 18 months 0.1 24 months 4 years 5 years 6 years $210,000 250,000 260,000 $ 85,000 100,000 110,000 Expected useful ife 0.6 0.5 0.25 0.3 0.2 0.15 0.35 One-time costs 0.2 0.4 0.55 0.25 0.25 Recurring costs 0.1 0.4 0.55 0.35 0.4 0.2 Annual tangible benefits starting with weighted average completion date 0.3 0.5 0.2 $220,000 233,000 240,000 0.25 0.5 0.25 $215,000 225,000 235,000

Financial Management: Theory & Practice
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter7: Corporate Valuation And Stock Valuation
Section: Chapter Questions
Problem 26SP
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*COST-BENEFIT ANALYSIS

Listed in the diagram are some probability estimates of the costs and benefits associated with two competing projects.

a. Compute the net present value of each alternative. Round the cost projections to the nearest month.

b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why?

DAYBACK PROBLEM 15: COST-BENEFIT ANALYSIS %3D Cost of Capital = .14 B Amount Probability Amount Probability 12 months 0.6 12 months 0.5 Project completion time 0.2 18 months 18 months 0.3 24 months 0.1 24 months 0.2 0.6 4 years 0.5 4 4 years Expected useful life 5 years 0.25 5 years 0.3 0.15 6 years 0.2 6. 6 years $200,000 0.2 $210,000 0.35 One-fime costs 0.4 250,000 0.55 250,000 0.25 300,000 0.25 260,000 0.1 $75,000 0.4 $85,000 Recurring costs 0.55 95,000 0.4 100,000 0.35 105,000 0.2 110,000 Annual tangible benefits starting with weighted average completion date 0.3 $220,000 0.25 $215,000 0.5 233,000 0.5 225,000 0.2 240,000 0.25 235,000
Transcribed Image Text:DAYBACK PROBLEM 15: COST-BENEFIT ANALYSIS %3D Cost of Capital = .14 B Amount Probability Amount Probability 12 months 0.6 12 months 0.5 Project completion time 0.2 18 months 18 months 0.3 24 months 0.1 24 months 0.2 0.6 4 years 0.5 4 4 years Expected useful life 5 years 0.25 5 years 0.3 0.15 6 years 0.2 6. 6 years $200,000 0.2 $210,000 0.35 One-fime costs 0.4 250,000 0.55 250,000 0.25 300,000 0.25 260,000 0.1 $75,000 0.4 $85,000 Recurring costs 0.55 95,000 0.4 100,000 0.35 105,000 0.2 110,000 Annual tangible benefits starting with weighted average completion date 0.3 $220,000 0.25 $215,000 0.5 233,000 0.5 225,000 0.2 240,000 0.25 235,000
COST-BENEFIT ANALYSIS Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alternative. Round the cost projections to the nearest month. b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why? PROBLEM 7: Cosr-BENEFIT ANALYSIS COST OF CAPITAL = .14 Probability Amount Probability Amount 0.5 0.3 0.2 0.6 12 months 18 months 24 months 4 years 5 years 6 years $210,000 250,000 260,000 $ 85,000 100,000 110,000 Project completion time 12 months 18 months 0.2 24 months 4 years 5 years 6 years $200,000 250,000 300,000 $ 75,000 95,000 105,000 0.1 Expected useful ife 0.6 0.5 0.25 0.15 0.35 0.3 0.2 0.2 0.55 0.25 0.4 0.4 0.2 One-time costs 04 0.25 Recurring costs 0.1 0.55 0.35 Annual tangible benefits starting with weighted average completion date 0.3 0.5 0.2 $220,000 233,000 240,000 0.25 0.5 0.25 $215,000 225,000 235,000
Transcribed Image Text:COST-BENEFIT ANALYSIS Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects. a. Compute the net present value of each alternative. Round the cost projections to the nearest month. b. Repeat step (a) for the payback method. c. Which method do you think provides the best source of information? Why? PROBLEM 7: Cosr-BENEFIT ANALYSIS COST OF CAPITAL = .14 Probability Amount Probability Amount 0.5 0.3 0.2 0.6 12 months 18 months 24 months 4 years 5 years 6 years $210,000 250,000 260,000 $ 85,000 100,000 110,000 Project completion time 12 months 18 months 0.2 24 months 4 years 5 years 6 years $200,000 250,000 300,000 $ 75,000 95,000 105,000 0.1 Expected useful ife 0.6 0.5 0.25 0.15 0.35 0.3 0.2 0.2 0.55 0.25 0.4 0.4 0.2 One-time costs 04 0.25 Recurring costs 0.1 0.55 0.35 Annual tangible benefits starting with weighted average completion date 0.3 0.5 0.2 $220,000 233,000 240,000 0.25 0.5 0.25 $215,000 225,000 235,000
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