Question: Tarragon needs to choose between two mutually exclusive investment projects, each lasting for five years. The company uses straight-line method of depreciation and its cost
- Tarragon needs to choose between two mutually exclusive investment projects, each lasting for five years. The company uses straight-line method of depreciation and its cost of capital is 15 per cent.
Project Alpha would generate annual cash inflows of 200,000 after the purchase of machinery costing 556,000, with a scrap value after five years of 56,000.
Project Beta would generate annual cash inflows of 500,000 after the purchase of machinery costing 1,616,000, with a scrap value after five years of 301,000.
Required:
Calculate, for each project, the return on capital employed (ROCE), net present value, and payback period. Advise which project should be undertaken based upon the results calculated.
2. The management of Manoga Associates is considering the purchase of a new copying center for the office that can copy, fax, and scan documents. The new machine costs $10,010 to purchase and is expected to provide cash flow savings over the next four years of $1,000; $3,000; $6,000; and $7,000. The employee in charge of performing financial analysis of the proposed investment has decided to use the IRR as her primary criterion for making a recommendation to the managing partner of the firm. If the discount rate the firm uses to value the cash flows from office equipment purchases is 15%, is this a good investment for the firm?
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