ACC Problems

ACC Problems - 11 Caledonia is considering two investments...

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11. Caledonia is considering two investments with one-year lives. The more expensive of the two is the better and will produce more savings. Assume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the following after-tax net cash flows: YEAR PROJECT A PROJECT B 0 -\$195,000 −\$1,200,000 1 240,000 1,650,000 a. Calculate the net present value. b. Calculate the profitability index. c. Calculate the internal rate of return. d. If there is no capital-rationing constraint, which project should be selected? If there is a capital-rationing constraint, how should the decision be made? a. Calculate the net present value. For project A : we look into Present Value of \$1 table to see the factor for \$240,000 one year from now at 10% which is 0.909 0.909*240,000 = 218,160 Then we subtract 218,160 – 195,000 and we get the NPV of \$23,160 Same thing for project B : 0.909*1,650,000 = 1,499,850 Then we subtract 1,499,850 – 1,200,000 = \$299,850 b. Calculate the profitability index PROJECT A Profitability Index: Present Value of Future Cash Flows \$218,160 Initial Investment \$195,000 Profitability Index 1.12 PROJECT B Profitability Index: Present Value of Future Cash Flows \$ 1,499,850 Initial Investment \$ 1,200,000 Profitability Index 1.25

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c. Calculate the internal rate of return PROJECT A Year Cash Flow 0 (\$195,000) 1 \$240,000 IRR 23% PROJECT B Year Cash Flow 0 (\$1,200,000)
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ACC Problems - 11 Caledonia is considering two investments...

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