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Tremaine Company is considering two mutually exclusive long-term investment projects. Project ABC would require an investment of

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Tremaine Company is considering two mutually exclusive long-term investment projects. Project ABC would require an investment of $240,000; have a useful life of 4 years, and annual cash flows of $78,000. Project XYZ would require an investment of $230,000; have a useful life of 5 years, and annual cash flows of $66,000. Using the NPV method and a 12 percent cost of capital, which project do you recommend Tremaine Company accept?

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Tremaine Company should select project XYZ because it has a positive NPV based on th...View the full answer


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PALASH JHANWAR
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Managerial Accounting

Managerial Accounting

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2nd edition

Authors: Stacey Whitecotton, Robert Libby, Fred Phillips

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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