The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm’s weighted average cost of capital is 8%. Data for each project are as follows:Black WhiteCost of investment—end 202025,000 Cost of investment—end 2020$43,000Cash inflow—20218,000 Cash inflow—202120,000Cash inflow—20228,000 Cash inflow—202230,000Cash inflow—20238,000 Cash inflow—202310,000Cash inflow—20248,000 Cash inflow—20240Cash inflow—20258,000 Cash inflow—20250 Requirements:Compute the net present value for each asset using Excel's NPV function.Determine which project the Riverside Company should invest in based on NPV.Compute the profitability index for each project.Determine which project the Riverside Company should invest in based on the profitability index.Should the firm invest in the Black or White project? What is the basis for your choice?

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Answered: The Riverside Company is evaluating two…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section10.A: Mutually Exclusive Investments Having Unequal Lives

Problem 4P

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The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm’s weighted average cost of capital is 8%. Data for each project are as follows:

Black		White
Cost of investment—end 2020	25,000		Cost of investment—end 2020	$43,000
Cash inflow—2021	8,000		Cash inflow—2021	20,000
Cash inflow—2022	8,000		Cash inflow—2022	30,000
Cash inflow—2023	8,000		Cash inflow—2023	10,000
Cash inflow—2024	8,000		Cash inflow—2024	0
Cash inflow—2025	8,000		Cash inflow—2025	0

Requirements:

Compute the net present value for each asset using Excel's NPV function.
Determine which project the Riverside Company should invest in based on NPV.
Compute the profitability index for each project.
Determine which project the Riverside Company should invest in based on the profitability index.
Should the firm invest in the Black or White project? What is the basis for your choice?

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