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Project Cash Flows B -$15,000 -$25,000 $9,500 $0 2 $12,500 $X 3 $7,500 $X PW(15%) $9,300

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 2BE

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Concept explainers

Risk Management Techniques

Risk management is the procedure of recognizing, analyzing, monitoring, and preventing the risks and threatening factors of investments and business. Risks can arise from various factors including internal controls, market changes, natural disasters, and failure in productions. Risk management techniques enable entities to control and minimize the risks as well as the threatening factors of the business and it also helps to improve the business.

Question

Consider the following two investment alternatives:
The firm's MARR is known to be 15%.
(a) Compute the PW (15%) for Project A.

(b) Compute the unknown cash flow X in years 2 and 3 for Project B.
( c) Compute the project balance (at 15%) for Project A at the end of year 3.
( d) If these two projects are mutually exclusive alternatives, which project would you select?

Project Cash Flows
B
-$15,000
-$25,000
$9,500
$0
2
$12,500
$X
3
$7,500
$X
PW(15%)
$9,300

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