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There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows:
Use the information from the previous exercise to calculate the
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- There are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment or $28.000 and is expected to generate the following cash flows: If the discount rate is 5% compute the NPV of each project and make a recommendation of the project to be chosen.arrow_forwardThere are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: If the discount rate is 12%, compute the NPV of each project.arrow_forwardJoliet Company is considering two alternative investments. The company requires an 18% return from its investments. Compute the IRR for both Projects and recommend one of them. For further instructions on internal rate of return in Excel, see Appendix C.arrow_forward
- Clearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated operating income, and net cash flow for each proposal are as follows: The companys capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals. Instructions 1. Compute the cash payback period for each of the four proposals. 2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. Round to one decimal place. 3. Using the following format, summarize the results of your computations in parts (1) and (2). By placing the computed amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should be accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 12% and the present value table appearing in Exhibit 2 of this chapter. 5. Compute the present value index for each of the proposals in part (4). Round to two decimal places. 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).arrow_forwardYour division is considering two projects. The required rate of return for both projects is 12%. Below are the cash flows of both the projects: (Note: show all computations) Projects Initial investment Year 1 Year 2 Year 3 Year 4 A -$50 $7 $12 $17 $25 B -$50 $20 $18 $12 $11 Calculate the Payback period and discounted payback period. Why are they different? Calculate the NPV for both the projects Which projects should be accepted on the basis of IRR?arrow_forwardAn IT company receives two new project proposals. Project A will cost $250,000 to develop and is expected to have an annual net cash flow of $50,000. Project B will cost $350,000 to develop and is expected to have an annual net cash flow of $60,000. Analyzing the two projects from a cashflow perspective using the payback period, which project is better? Why? Write the answers in the “Payback" tab of the attached EXCEL template. You may use the Payback Period template if you wish to. Note: Enter the discounted costs and benefits for your project below. Add and delete rows as needed. Year Costs Benefits Cumulative Costs Cumulative Benefits 1 2 3 4arrow_forward
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- Please describe NPV, IRR and their relationship. How do you evaluate each for making an investment decision? That is, what is a favorable NPV and IRR for making an investment decision. If you were developing a capital budgeting process at your employer, how would you prioritize your projects? What is the NPV when IRR = WACC, IRR>WACC, and IRR<WACC? There is a duplex for sale in Absecon for $700,000 at this time. It has 2 units that generate a total of $25,000 in gross rent. The property taxes are $4,000, commercial property insurance is $2,000, flood insurance is $1,000, and annual maintenance is $2,000. You expect to sell it in one year at a price growth of 0%. What is the NPV with a WACC of 10%. Is the IRR greater or less than the WACC? Would you invest in this project and why?arrow_forwardThere are two projects under consideration by the Rainbow factory. Each of the projects will require an initial investment of $35,000 and is expected to generate the following cash flows: First Year Second Year Third Year Total Alpha Project $32,500 $23,000 $5,500 $61,000 Beta Project 8,000 23,000 28,000 59,000 (Click here to see present value and future value tables) https://openstax.org/books/principles-managerial-accounting/pages/time-value-of-money A. If the discount rate is 12%, compute the NPV of each project. Round your present value factor to three decimal places and final answer to answer to 2 decimal places. Alpha Project...? Beta Project...?arrow_forwardAlfredo Auto Parts is considering investing in a new forming line for grille assemblies. For a five-year study period, the cash flows for two separate designs are shown below. Create a spreadsheet that will calculate the present worths for each project for a variable ALARR. Through trial and error, establish the ALARR at which the present worths of the two projects are exactly the same. Cash Flows for Grille Assembly Project Automated Line Manual Line Disburse- Net Cash | Disburse- Net Cash Year | ments | Receipts | Flow ments | Receipts Flow 0 [e1 500000 [€ 0 [-€1 500 000 [€1 000 000 | € o[ -€1 000 000 1 50 000 | 300 000 250000 [ 20000 [ 200 000 180 000 2 60 000 | 300 000 240000 [ 25000 [ 200 000 175 000 3 70 000 | 300 000 230 000 30 000 | 200 000 170 000 4 80000 [ 300 000 220 000 35000 | 200 000 165 000 5 90 000 [ 800 000 710000 40000 [ 200 000 160 000arrow_forward
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