Question

28. Romo Company is considering investing in one of the following two projects: Annual Cash Inflows Year Project A S 1,000 2.000 2.000 Project B 3.000 1,000 1.000 1.000 6,000 Total $ 6,000 Required: Show your work if you want partial credit. Total points: 30 1) Which project is more desirable strictly in terms of cash inflows? Why? Write a short sentence to explain your opinion Which Project? iw: 2) Compute the present value of each project's cash inflows assuming the company's required rate of return is 10%. Project A ProjectB

Answer 1

		ROMO COMPANY
		Annual Cash Inflows
	Year	Project A	Project B
	1	$           1,000.00	$              3,000.00
	2	$           2,000.00	$              1,000.00
	3	$           2,000.00	$              1,000.00
	4	$           1,000.00	$              1,000.00
	Total	$           6,000.00	$              6,000.00
1)	Project B is more desirable because majority of cash flows occur earlier .
	As per the time value of money present value of dollar received in earlier years have more value.
2)
	Year	Project A			Project B
		(A)	(B)	(A)*(B)	(C )	(D)	(C )*(D)
		Cash Flow	P.V Factor@10% for 4 years	P.V	Cash Flow	P.V Factor@10% for 4 years	P.V
	1	$           1,000.00	0.909	$     909.00	$ 3,000.00	0.909	$   2,727.00
	2	$           2,000.00	0.826	$ 1,652.00	$ 1,000.00	0.826	$       826.00
	3	$           2,000.00	0.751	$ 1,502.00	$ 1,000.00	0.751	$       751.00
	4	$           1,000.00	0.683	$     683.00	$ 1,000.00	0.683	$       683.00
				$ 4,746.00			$   4,987.00