Question: The Riverside Company is evaluating two mutually exclusive projects: Black and White, at the end of 2016. The firms weighted average cost of capital is
The Riverside Company is evaluating two mutually exclusive projects: Black and White, at the end of 2016. The firms weighted average cost of capital is 8%. Data for each project are as follows:
| Black | White | |||
| Cost of investmentend 2016 | 25,000 |
| Cost of investmentend 2016 | $43,000 |
| Cash inflow2017 | 8,000 |
| Cash inflow2017 | 20,000 |
| Cash inflow2018 | 8,000 |
| Cash inflow2018 | 30,000 |
| Cash inflow2019 | 8,000 |
| Cash inflow2019 | 10,000 |
| Cash inflow2020 | 8,000 |
| Cash inflow2020 | 0 |
| Cash inflow2021 | 8,000 |
| Cash inflow2021 | 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 |
Requirements:
Compute the net present value for each project using the time value of money tables presented in the problem.
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?
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
Study Help