Question

Asked Nov 15, 2019

3 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

Hence, cumulative inflows are ascertained by adding the cash inflows of one year with the cash flows of the next year

Step 2

Hence, payback period for Project B is 2.67 years which is ascertained by dividing the difference of cash outlay and cumulative cash inflows with the difference of cumulative cash inflows immediate larger than cash outflows and cumulative cash inflows and adding the year when cash outlay comes under the cumulative cash inflows

Step 3

Hence, cumulative inflows are ascertained by adding the cash in...

Tagged in

Find answers to questions asked by student like you

Show more Q&A

Q: M6-16 Using Percentage-of-Completion and Completed Contract Methods Halsey Building Company signed a...

A: a.Calculate the gross profit under percentage of completion method as follows:

Q: Thrice Corp. uses no debt. The weighted average cost of capital is 4.8 percent. If the current marke...

A: Earning before interest and taxes are calculated to determine the earnings of the company before tax...

Q: A company releases a five-year bond with a face value of $1,000 and coupons paid semiannually. If ...

A: When the bond issued at par, the coupon rate is equal to the yield to maturity of the bond. Hence, t...

Q: Part 1: The CFO of Cruz, inc. is considering Projects A and B which are considered equally risky; th...

A: “Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for y...

Q: 8.6 letters a b and c

A: Hi there, Thanks for posting the question. But as per Q&A guidelines, we should answer the first...

Q: Your firm is considering a one-year loan for $522,000. The fees are 2% of the loan amount and the in...

A: The lender deducts the fees upfront while disbursing the money, so effectivly the borrower get the p...

Q: This year (10 years after you first took out the loan), you check your loan balance. Only part of yo...

A: Hi, there is some additional data missing the question. The total mortgage amount, interest rate, pr...

Q: Georgia, a widow has take-home pay of $600 a week. Her disability insurance coverage replaces 70% of...

A: Calculate the amount would she receive in disability benefits as follows:

Q: A share of common stock has just paid a dividend of $3.00. If the expected long-run growth rate for...

A: The market value of the stock is the current stock price in the market at which the trading of the e...