You are considering two independent projects that have differing requirements.
Project A has a required return of 12 percent compared to Project B's required return of 13.5 percent. Project A costs $75,000 and has cash flows of $21,000, $49,000, and $12,000 for Years 1 to 3, respectively.
Project B has an initial cost of $70,000 and cash flows of $15,000, $18,000, and $41,000 for Years 1 to 3, respectively.
Which of the two should you accept/reject? Explain.
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Ответ:
I will accept Project "B."
Explanation:
Though, Project B has a higher required Return on Investment ROI which is 13.5% but has a progressive increasing cash flow of Project B has an initial cost of $70,000 and cash flows of $15,000, $18,000, and $41,000 for Years 1 to 3, respectively.
Analysis of the Cash Flow:
$18,000.00 - $15,000.00 = $3,000.00
$41,000.00 - $18000.00 = $23,000.00.
∴ with Initial Outlay of $70,000.00
$3,000.00 + $23,000.00 = $26,000.00
while
Project A has a retrogressive trend of cash flow of $21,000.00
∴$49,000.00 - $21,000.00 = $28,000.00
$28,000.00 - $12,000.00 = $16,000.00
Therefore comparing the two figures from Project A & B respectively:
Project A = $16,000.00
Project B = $26,000.00
It shows a deficit of $10,000.00 for Project B & surplus of $10,000.00 for Project A in the 3 years of required ROI.
Ответ:
The correct answers on Edg. are:
A.) What can go wrong?
D.) What is the likely return?
E.) Is the risk worth the return? :)