Each of the following scenarios is independent. Assume that all cash ows are after-tax cash a. Cobre

Question:

Each of the following scenarios is independent. Assume that all cash ï¬‚ows are after-tax cash

a. Cobre Company is considering the purchase of new equipment that will speed up the processfor extracting copper. The equipment will cost $3,600,000 and have a life of 5 years with noexpected salvage value. The expected cash ï¬‚ows associated with the project are as follows:

b. Emily Hansen is considering investing in one of the following two projects. Either projectwill require an investment of $75,000. The expected cash revenues minus cash expenses forthe two projects follow. Assume each project is depreciable.

c. Suppose that a project has an ARR of 30% (based on initial investment) and that the aver-age net income of the project is $120,000.
d. Suppose that a project has an ARR of 50% and that the investment is $150,000.
Required:
1. Compute the ARR on the new equipment that Cobre Company is considering.
2. Which project should Emily Hansen choose based on theARR? Notice that the payback period is the same for both investments (thus equally preferred). Unlike the payback period, explain why ARR correctly signals that one projectshould be preferred over the other
3. How much did the company in Scenario c invest in the project?
4. What is the average net income earned by the project in Scenario d?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...