Papaya Inc. intends to invest in one of two fruit juice manufacturing plants, Plant A and Plant
Question:
Papaya Inc. intends to invest in one of two fruit juice manufacturing plants, Plant A and Plant B. The life of Plant A and Plant B models is 12 years. Plant A requires an initial investment of $980,000 and has a net annual after-tax cash inflow of $190,000. Plant B requires an initial investment of $1,590,000 and has a net annual after-tax cash inflow of $220,000. The cost of capital for the company is 12%. Which of the following opinions is true regarding the two plants? (Discount factor for i = 12%. It is 6.19437 for 12 years.) (Round your answer to two decimal places.)
a. Papaya Inc. should select Plant A because the NPV of Plant A is lower than that of Plant B.
b. Papaya Inc. should select Plant A because the NPV of Plant A is higher than that of Plant B.
c. Papaya Inc. should select Plant B because the NPV of Plant B is higher than that of Plant A.
d. Papaya Inc. should select Plant B because the NPV of Plant B is lower than that of Plant A.
Cornerstones of Financial and Managerial Accounting
ISBN: 978-1111879044
2nd edition
Authors: Rich, Jeff Jones, Dan Heitger, Maryanne Mowen, Don Hansen