Question

Asked Oct 27, 2019

55 views

Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the following after tax cash flows:

Year |
Project A |
Project B |

1 |
$5,000,000 |
$20,000,000 |

2 |
$10,000,000 |
$10,000,000 |

3 |
$15,000,000 |
$8,000,000 |

4 |
$20,000,000 |
$6,000,000 |

a) Calculate the payback period for both projects, then compare to identify which project the firm should undertake. [Note: you are supposed to show every step of your calculation and interpret the result.]

Step 1

Payback period can be defined as the time length required by the project to recover the total cash outflow made at the time of starting of project.

Step 2

The table below shows the cash inflow for each year and cumulative cash flows for project A.

Step 3

The formula to calculate paybac...

Tagged in

Q: If you disounted a set of positive real cash flows with a nominal discount rate and inflation were p...

A: Justification:Suppose the positive cash flows are discounted with the inflation rate, which is posit...

Q: Why do most acquisitions fail to create shareholder value?

A: Mergers and acquisitions generally failed to create or add value for the shareholders because of ove...

Q: I attached an image of things that "could go onto a cash flow statement" would you advise using any ...

A: The building of a factory or purchase of equipment will be counted while calculating capital budgeti...

Q: Camber Corporation has to decide if they can finance purchasing 10 new machines for all their manufa...

A: The actual cost of each machine is $1,730,000 and total cost to be required to purchase 10 machines ...

Q: What are the three forms of Efficient MArket Hypothesis and what are the criticisms of each from the...

A: The Efficient Market Hypothesis means that the market investors have an entree to all information ob...

Q: Optimal corporation wants to expand their manufacturing facilities. They have two choices, first to ...

A: It is given that firm must incur $290,000 for two years, if it chooses option 1. The second option i...

Q: You own a furniture manufacturing company. You are looking to expand into glass furniture and need t...

A: Computation of ARR:Machine 2 can be purchased as it has the higher ARR of 32.73%.Excel spread sheet:

Q: 9. Duration is an important measure of interest rate risk. The duration is the percent the price of ...

A: As per the given information, the percentage change in the bond\'s yield to maturity is 2% (7% - 5%)...

Q: At age 18, Susan did nothing. She waited until she was 28 to start depositing $2000 per year at the ...

A: Annuity, A = $ 2,000Interest rate, r = 12%Number of annuities = n = 65 - 28 = 37