Question: Problem 4-1 The Riverside Company is evaluating two mutually exclusive projects: Black and White, at the end of 2013. The firms weighted average cost of
Problem 4-1
The Riverside Company is evaluating two mutually exclusive projects: Black and White, at the end of 2013. The firms weighted average cost of capital is 8%. Data for each project are as follows:
Black White
| Cost of investmentend 2013 | 25,000 |
| Cost of investmentend 2013 | $43,000 |
| Cash inflow2014 | 8,000 |
| Cash inflow2014 | 20,000 |
| Cash inflow2015 | 8,000 |
| Cash inflow2015 | 30,000 |
| Cash inflow2017 | 8,000 |
| Cash inflow2016 | 10,000 |
| Cash inflow2018 | 8,000 |
| Cash inflow2017 | 0 |
| Cash inflow2019 | 8,000 |
| Cash inflow2018 | 0 |
Time value of money tables for an 8% discount rate are:
Present Value of 1 Present Value of an Annuity
| n | Table Factor |
| n | Table Factor |
| 1 | .92593 |
| 1 | .92593 |
| 2 | .85734 |
| 2 | 1.78326 |
| 3 | .79383 |
| 3 | 2.57710 |
| 4 | .73503 |
| 4 | 3.31213 |
| 5 | .68058 |
| 5 | 3.99271 |
Required:
Compute the net present value for each project using the time value of money tables presented in the exercise.
Determine which project the Riverside Company should invest in based on NPV.
Compute the profitability index for each project.
Determine which project the Riverside Company should invest in based on the profitability index.
Should the firm invest in the Black or White project? What is the basis for your choice?
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