AMCE Company is considering two mutually exclusive investment alternatives. Its estimated weighted-average cost of capital, used as the discount rate for capital budgeting purposes, is 10%. Following is information regarding each of the two projects:
Alternative 1 Alternative 2
Required investment outlay $170,000 $100,000
Incremental after-tax cash inflows/year $50,000 $30,000
Estimated project life (in years) 5 5
Estimated salvage value (end of life) $0 $0
Compute the estimated net present value of each project and determine which alternative, based on NPV, is more desirable. (The PV annuity factor for 10%, 5 years, is 3.7908.)
Compute the profitability index (PI) for each alternative and state which alternative, based on PI, is more desirable.
Why do the project rankings differ under the two methods of analysis? Which alternative would you recommend, and why?
Recently Asked Questions
- Special Order Tobitzu TV produces wall mounts for flat panel television sets. The forecasted income statement for 2009 is as follows: TOBITZU TV Budgeted
- Certain race cars use methanol (CH 3 OH; also called wood alcohol) as a fuel. Methanol has a molecular mass of 32.0 g/mol and a density of 0.79 g/mL. The
- MINI CASE: R.K.MAROON COMPANY R.K. Maroon is a seed-stage web-oriented entertainment company with important intellectual property. RKM’s founders, all