Two competing project proposals, 1 and 2, are currently under consideration for the manufacture of a new product line. Information for each of the projects is as follows, with cash flows stated in nominal terms: Project Estimated life 1 2 5 years 3 years $200 000 Initial outlay $600 000 Annual after-tax cash flows $175 000 $245 000 1.1 Assume that projects 1 and 2 are of average risk to the firm, and the firm's cost of capital is 5.5% p.a., stated in real terms. If inflation is expected to be 4.25% p.a. for each of the next five years, calculate the net present value of each project. Round your answer off to the nearest dollar. 1.2 Which of the two projects you will select to implement? Motivate your answer.
Two competing project proposals, 1 and 2, are currently under consideration for the manufacture of a new product line. Information for each of the projects is as follows, with cash flows stated in nominal terms: Project Estimated life 1 2 5 years 3 years $200 000 Initial outlay $600 000 Annual after-tax cash flows $175 000 $245 000 1.1 Assume that projects 1 and 2 are of average risk to the firm, and the firm's cost of capital is 5.5% p.a., stated in real terms. If inflation is expected to be 4.25% p.a. for each of the next five years, calculate the net present value of each project. Round your answer off to the nearest dollar. 1.2 Which of the two projects you will select to implement? Motivate your answer.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 11P
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