1) Anoma Inc. is considering two mutually exclusive projects. Each requires an initial investment of $100,000. John...
Question:
1) Anoma Inc. is considering two mutually exclusive projects. Each requires an initial investment of $100,000. John Shell, president of the company, has set a maximum payback period of 4 years. The after-tax cash inflows associated with each project are shown in the following table:
| Year | Cash inflow of Project A | Cash inflow of Project B |
| 1 | $ 10,000 | $ 40,000 |
| 2 | 20,000 | 30,000 |
| 3 | 30,000 | 20,000 |
| 4 | 40,000 | 10,000 |
| 5 | 20,000 | 20,000 |
a. Determine the payback period of each project.
b. Because they are mutually exclusive, Shell must choose one. Which should the company invest in?
c. Explain why one of the projects is a better choice than the other.
2) Neil Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 16% cost of capital.
Project A | Project B | Project C
| |
Initial Investment | $40,000 | $ 40,000 | $ 40,000 |
Year | Cash inflows ($) | ||
1 | 13,000 | 7,000 | 19,000 |
2 | 13,000 | 10,000 | 16,000 |
3 | 13,000 | 13,000 | 13,000 |
4 | 13,000 | 16,000 | 10,000 |
5 | 13,000 | 19,000 | 7,000 |
a. Calculate each project’s payback period. Which project is preferred according to this method?
b. Calculate each project’s net present value (NPV). Which project is preferred according to this method?
c. Comment on your findings in parts a and b, and recommend the best project. Explain your recommendation.
Expert Answer:
answer 1 a The payback period for both projects is 4 years b Both the projects have the same payback ... View the full answer
