The R.M. Company uses the following risk-adjusted discount rates for capital budgeting purposes: Investments in new...
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The R.M. Company uses the following risk-adjusted discount rates for capital budgeting purposes: Investments in new product lines Substitution of labour with capital (machinery) Expansion of existing product lines Replacement of existing equipment The firm has $500,000 of available capital for investment Project A involves the production of a brand new product line. Project B involves the replacement of existing machinery. Project C involves the purchase of a more sophisticated piece of equipment as a replacement for existing machinery. This more sophisticated machine will enable R.M. Company to reduce the size of its workforce. There are no other projects available at this time. Expected cash flows for these independent projects are as follows: Projects Investment Net after-tax cash flows Year 1 Year 2 Year 3 Year 4 A 14% 12% 10% 6% 400 160 150 140 130 B (in thousands of dollars) 500 130 150 180 210 с 100 30 40 50 60 Which project(s) would you recommend the company undertake? Show your calculations and provide any necessary explanations. (4 marks) The R.M. Company uses the following risk-adjusted discount rates for capital budgeting purposes: Investments in new product lines Substitution of labour with capital (machinery) Expansion of existing product lines Replacement of existing equipment The firm has $500,000 of available capital for investment Project A involves the production of a brand new product line. Project B involves the replacement of existing machinery. Project C involves the purchase of a more sophisticated piece of equipment as a replacement for existing machinery. This more sophisticated machine will enable R.M. Company to reduce the size of its workforce. There are no other projects available at this time. Expected cash flows for these independent projects are as follows: Projects Investment Net after-tax cash flows Year 1 Year 2 Year 3 Year 4 A 14% 12% 10% 6% 400 160 150 140 130 B (in thousands of dollars) 500 130 150 180 210 с 100 30 40 50 60 Which project(s) would you recommend the company undertake? Show your calculations and provide any necessary explanations. (4 marks)
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Answer rating: 100% (QA)
Project A NPV 130000 1 0141 150000 1 0142 140000 1 0143 130000 1 0144 400000 NPV 11... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
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