Consider the following after-tax cash flows:
n A B
0 -2500 -5000
1-6 2000 2500
7 2000 0
MARR is 10% (compounded annually)
(a) Compute the future worths of the projects at the end of period 7.
(b) Assume that the required service period is seven years and that the company is considering a comparable equipment that has an annual lease expense of $10,000 for period seven (to be paid at the end of year 7), if project B is chosen. This will result in an income of $12,500 at the end of period 7. Which project is the better choice, using present worth as the criteria?
Consider the following after-tax cash flows:
n A B
0 -2500 -5000
1-6 2000 2500
7 2000 0
MARR is 10% (compounded annually)
(a) Compute the future worths of the projects at the end of period 7.
(b) Assume that the required service period is seven years and that the company is considering a comparable equipment that has an annual lease expense of $10,000 for period seven (to be paid at the end of year 7), if project B is chosen. This will result in an income of $12,500 at the end of period 7. Which project is the better choice, using present worth as the criteria?
Related questions
Capital budgeting criteria
A company has a 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:
| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Project A | -$300 | -$387 | -$193 | -$100 | $600 | $600 | $850 | -$180 |
| Project B | -$400 | $135 | $135 | $135 | $135 | $135 | $135 | $0 |
a)What is each project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
Project A $
Project B $
b) What is each project's IRR? Round your answer to two decimal places.
Project A
Project B
c) What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life.) Round your answer to two decimal places. Do not round your intermediate calculations.
Project A
Project B
e) Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value should be indicated by a minus sign.
| Discount Rate | NPV Project A | NPV Project B |
| 0% | $ | $ |
| 5 | $ | $ |
| 10 | $ | $ |
| 12 | $ | $ |
| 15 | $ | $ |
| 18.1 | $ | $ |
| 24.83 | $ | $ |
F) Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. Do not round your intermediate calculations.
G) What is each project's MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations.
Project A
Project B
33. Cranberry Manufacturing Company is considering an asset replacement project of replacing a control device. This old control device has been fully depreciated but can be sold for $4,000. The new control device, which is more automated, will cost $22,000. The new deviceâs installation and shipping costs will total $10,000. The new device will be depreciated on a straight-line basis over its 2-year economic life to an estimated salvage value of $0. The actual salvage value of this device at the end of 2-year period (That is, the market value of the device at the end of 2-year period) is estimated to be $3,000. If the replacement project is accepted, Cranberry will require an initial working capital investment of $3,000 (that is, adding $3,000 initially to its net working capital).
During the 1st year of operations, Cranberry expects its annual revenue to increase from $65,500 to $85,000. After the 1st year, revenues from the replacement are expected to increase at a rate of $2,200 a year for the remainder of the project life.
Cranberry's incremental operating costs associated with the replacement project are expected to decrease from $20,000 to $12,000 during the 1st year and increase at a rate of $2500 for the remainder of the project life.
Cranberry expects that it will have to add about $2,000 to its net working capital in year 1, and nothing in year 2. At the end of the project, the total accumulated net working capital required by the project will be recovered.
Cranberry has a marginal tax rate of 35%.
| What is the net operating cash flow at the end of year 2? |
A. $31,785
B. $30,905
C. $30,230
D. $35,210
FYI: **Calculated from a previous question: Initial Net Income = $32,400**
