Carr Company has to choose between two capital investment proposals (Important:
ID: 2533407 • Letter: C
Question
Carr Company has to choose between two capital investment proposals (Important: It can only fund one of them). Estimates regarding each project are provided below: Project Soup Project Nuts Initial investment $400,000 $600,000 Annual net income 30,000 46,000 Net annual cash inflow 110,000 146,000 Estimated useful life 5 years 6 years Salvage value -0- -0- The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111 The net present value for Project Soup is a. $17,010 b. $50,000 c. $117,010 d. $550,000
The internal rate of return for Project Soup is
greater than the discount rate of 10%
less than the discount rate of 10%
equal to the discount rate of 10%
none of the above.
The net present value for Project Nuts is
$635,830
$200,330
$100,000
$35,830
a.greater than the discount rate of 10%
b.less than the discount rate of 10%
c.equal to the discount rate of 10%
d.none of the above.
Explanation / Answer
For project soup,
net present value of net cash inflows = net annual cash inflows * annuity factor at 10% for 5 years
= 110000 * 3.791
= $ 417010
Net present value of project soup = 417010- 400000
= $ 17010
Internal rate of return for project soup will be HIGHER THAN 10% because npv have indirect relation with discount rate which means NPV will decrease when we increase the discount rate.
Net Present value of cash inflows for project nuts = net annual cash inflows * annuity factor at 10% for 6 years
= 146000 * 4.355
= $ 635830
Net Present value for project NUTS = 635830 - 600000
= $ 35,830