Listed in the diagram for Problem 7 are some probability estimates of the costs and benefits associated with two competing projects.

a. Compute the net present value of each alternative. Round the cost projections to the nearest month.

b. Repeat step (a) for the payback method.

c. Which method do you think provides the best source of information? Why?
 

Transcribed Image Text:

PROBLEM 7: CosT-BENEIT ANALYSIS COST OF CAPITAL = .14 Probability Amount Probability Amount Project completion time 0.5 12 months 0.6 12 months 0.2 0.1 0.3 18 months 18 months 0.2 24 months 24 months Expected useful life 0.6 4 years 5 years 6 years $200,000 250,000 300,000 $ 75,000 95,000 105,000 0.5 0.3 0.2 4 years 5 years 6 years $210,000 250,000 260,000 $ 85,000 100,000 110,000 0.25 0.15 One-time costs 0.35 0.2 0.4 0.55 0.25 0.1 0.55 0.25 Recurring costs 0.4 0.4 0.35 0.2 Annual tangble benefts starting with weighted average completion date $220,000 233,000 240,000 0.3 0.25 $215,000 225,000 235,000 0.5 0.5 0.2 0.25 PROBLEM 7: CosT-BENEIT ANALYSIS COST OF CAPITAL = .14 Probability Amount Probability Amount Project completion time 0.5 12 months 0.6 12 months 0.2 0.1 0.3 18 months 18 months 0.2 24 months 24 months Expected useful life 0.6 4 years 5 years 6 years $200,000 250,000 300,000 $ 75,000 95,000 105,000 0.5 0.3 0.2 4 years 5 years 6 years $210,000 250,000 260,000 $ 85,000 100,000 110,000 0.25 0.15 One-time costs 0.35 0.2 0.4 0.55 0.25 0.1 0.55 0.25 Recurring costs 0.4 0.4 0.35 0.2 Annual tangble benefts starting with weighted average completion date $220,000 233,000 240,000 0.3 0.25 $215,000 225,000 235,000 0.5 0.5 0.2 0.25

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Step 1 of 3 A CostBenefit Analysis NPV NPV is calculated for the recurring cost according to the pro... View the full answer