Question

8) Dolly Madison Company is considering two investments. The relevant data follows Project A $200,000 $50,692 $50,000 Project B $300,000 $60,995 $70,000 Cost Annual cash savings(end of year) Terminal salvage value Estimated useful life in years Minimum desired rate of return Method of depreciation 10% Straight-line 10% Straight-line Present Value OF$1 for 5 periods 5% Present Value of Ordinary Annuity of $1 for 5 periods 4.3295 4.2124 4.1002 3.9927 3.7908 3.6048 3.4331 0.7835 0.7473 0.713 0.6806 0.6209 0.5674 0.5194 8% 10% 12% 14% NPVA Ignoring taxes, the internal rate of return for Project A is approximately A) 8% B) 10% f NPV = Zero C) 12% D) 14% Answer: D Diff: 2 LO: 11-1 AACSB: Analytic skills Learning Outcome: Calculate the NPV, internal rate of return, payback period, and accounting rate of return and use to evaluate a potential investment; Discuss the basics of capital investments and illustrate the time value of money concepts TV PV = (NCF* Pufactor) - Investment.

Answer 1

Ans. NPV of Project A = ($50,692 x 3.7908) + ($50,000 x 0.6209) - $200,000 = $23,208

NPV of Project B = ($60,995 x 3.7908) + ($70,000 x 0.6209) - $300,000 = ($25,317)

NPV of Project A is higher. Therefore, the company should select Project A.

IRR of the project is 14%

Payback period = $200,000 / $50,692 = 3.95 Years

Accounting rate of Return of Project A = $23,208 / $200,000 = 11.604%