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?

#### Top Answer

Dear Student, Please find... View the full answer

## This question was asked on Feb 07, 2011 and answered on Feb 08, 2011.

### Recently Asked Questions

- Please refer to the attachment to answer this question. This question was created from CHEM 181L LABORATORY MANUAL revised Jan 2016(5)-4.pdf.

- You decide to use the normal distribution to approximate the binomial distribution. You want to know the probability of getting from 7 to 13 heads out of 20

- Tory Company sells a single product. Troy estimates demand and costs at various activity levels as follows: Units SoldPriceTotal Variable CostsFixed Costs