You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm's ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Allied is planning to introduce entirely new models after 3 years. Here are the projects' net cash flows (in thousands of dollars): Project L -$100 Project S -$100 Year 0 (Initial Investment) 1 $10 $70 2 $60 $50 $80 $20 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm's average project. Allied's cost of capital/discount rate (r) is 10%. (i) Calculate Each Project's NPV using the NPV formula. According to NPV, which project(s) should be accepted if they are independent? mutually exclusive?
You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm's ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Allied is planning to introduce entirely new models after 3 years. Here are the projects' net cash flows (in thousands of dollars): Project L -$100 Project S -$100 Year 0 (Initial Investment) 1 $10 $70 2 $60 $50 $80 $20 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm's average project. Allied's cost of capital/discount rate (r) is 10%. (i) Calculate Each Project's NPV using the NPV formula. According to NPV, which project(s) should be accepted if they are independent? mutually exclusive?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You recently went to work for Allied Components Company, a supplier of auto repair parts used in the
after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief
financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project
L involves adding a new item to the firm's ignition system line; it would take some time to build up the
market for this product, so the cash inflows would increase over time. Project S involves an add-on to an
existing line, and its cash flows would decrease over time. Both projects have 3-year lives because Allied
is planning to introduce entirely new models after 3 years.
Here are the projects' net cash flows (in thousands of dollars):
Project L
-$100
$10
Project S
-$100
$70
$50
$20
Year
0 (Initial Investment)
1
$60
$80
2
Depreciation, salvage values, net working capital requirements, and tax effects are all included in these
cash flows.
The CFO also made subjective risk assessments of each project, and he concluded that both projects
have risk characteristics that are similar to the firm's average project. Allied's cost of capital/discount
rate (r) is 10%.
(i)
be accepted if they are independent? mutually exclusive?
Calculate Each Project's NPV using the NPV formula. According to NPV, which project(s) should
(ii)
Calculate Each Project's IRR using Excel. According to IRR, which project(s) should be accepted if
they are independent? mutually exclusive?
(iii)
should be accepted if the firm's maximum acceptable payback is 2 years, if Projects L and S are
independent, if Projects L and S are mutually exclusive? :
Find the paybacks for Projects L and S. According to the payback criterion, which project(s)
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