Question

Summer 2020 The Wilson Company has an opportunity to invest in one of two new projects. They are mutually exclusive. Project A requires a $300,000 investment for the new machinery with a 5-year life and no salvage value. Project B requires a $45,000 investment with a $5,000 salvage value -- also with a 5-year life. The two projects yield the following predicted annual future results. The company uses straight-line depreciation, and cash flows occur evenly throughout the year. Wilson Company has the following Weighted Average Cost of Capital (WACC) information: Capital Structure Capital % Pre-Tax Cost of Capital Applicable Tax Rate After-Tax Cost of Capital Weighted Ave. Cost of Capital Description Debt Stock Total $100,000 200,000 $300,000 13.00% 17.96% These projects are judged to have a "normal" amount of risk, and for such projects, the company uses the WACC as the discount rate. The applicable tax rate is 30%. The pre-tax cost of capital for debt is 13.00%, and the pre-tax cost of equity is 17.96%. Round the WACC to one decimal point.s (i.e., 10.0%). Year 2 Year 1 $359,523 Year 3 $359,523 Year 4 $359,523 $359,523 Year 5 $1,430,952 Project A Sales Expenses: Direct Materials Direct Labor Overhead (Including Depreciation) Selling and Administrative Expense Total Expenses 35,952 107,857 200,000 30,000 373,809 35,952 107,857 200,000 30,000 373,809 35,952 107,857 200,000 30,000 373,809 35,952 107,857 200.000 30,000 373,809 143,095 429,286 200,000 30,000 802,381 Pretax Income Income Taxes (30%) Net Income (14,286) (14,286) (4,286) (4,286) ($10,000) ($10,000) (14,286) (4,286) ($10,000) (14,286) (4,286) ($10,000) 628,571 188,571 $440,000 Year 1 $170,239 Year 2 $170,239 Year 3 $170,239 Year 4 $170,239 Year 5 $170,239 Project B Sales Expenses: Direct Materials Direct Labor Overhead (Including Depreciation) Selling and Administrative Expense Total Expenses 17,024 51,072 75,000 10,000 153,096 17,024 51,072 75,000 10,000 153,096 17,024 51,072 75,000 10,000 153,096 17,024 51,072 75,000 10,000 153,096 17,024 51,072 75,000 10,000 153,096 Pretax Income Income Taxes (30%) Net Income 17,143 5,143 $12,000 17,143 5,143 $12,000 17,143 5,143 $12,000 17,143 5,143 $12,000 17,143 5,143 $12,000

describe, and explain how the following computations pertain to the company’s profitability, and how the required rate of return (discount rate)and these computations impact the projector projects’ approval:

9. Break-Even Time (BET):

Answer 1

CFAT = Net Income + Depreciation + Amortization + Other Non-Cash Charges

Note: IRR is higher than the cost of capital, the project can be selected

• IRR does not take into consideration the duration of the project. For example, if the company has to choose between two projects – Project A with IRR 15% and duration is one year and Project B with IRR 20% and project duration is 5 years and the cost of the capital of the company is 10% – both the projects are profitable. If the company selects Project B because it has a higher IRR it would be incorrect as the duration of Project B is longer.
• IRR assumes that the cash flows are reinvested at the same rate as the project, instead of the cost of capital. Hence, IRR may not give a true picture of the profitability.

Page No Date 2017 2018 2019 2020 2021 Initial outflow 2,50,000 ATCE WACC (10%) 1,00,000 gogog 150,000 2,000,000 250.00 1, 23,967 1,50,263 170,75 Sum of PV. Initial Investment = 5,3 5,892 (Inflow) Coutflow) 250,0oo. NPV 2 8 5 892 <wet present valve) IRR when NP V is zeno. so IRR would be 47.96 Formula : C FA n (+IRRA 202078/1 10:01

this is a sample that in this way you can solve this question because there is a mistake in question that project A has not even cash flow as per the question and in project B the invest was too much less than the cash flow of the years that mean that question was wrongly printed. If you have any query connect with me on the comment box.