Question

The following capital expenditure projects have been proposed for management's consideration at Scott, Inc., for the upcoming budget year: Use Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) Project Year(s) A B C D E Initial investment 0 $ (54,000 ) $ (58,000 ) $ (115,000 ) $ (116,000 ) $ (232,000 ) Amount of net cash return 1 13,000 0 39,000 11,600 75,000 2 13,000 0 39,000 23,200 75,000 3 13,000 26,000 39,000 34,800 41,000 4 13,000 26,000 39,000 46,400 41,000 5 13,000 26,000 39,000 58,000 41,000 Per year 6-10 13,000 13,900 0 0 41,000 NPV (18% discount rate) $ 4,423 $ ? $ ? $ ? $ 5,491 Present value ratio 1.08 ? ? ? ? rev: 12_21_2016_QC_CS-72735 2.value: 5.00 points

Required information Required: a. Calculate the net present value of projects B, C, and D, using 18% as the cost of capital for Scott, Inc. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)

b. Calculate the present value ratio for projects B, C, D, and E.

C. Which projects would you recommend for investment if the cost of capital is 18% and

c-1. $120,000 is available for investment?

c-2. $353,000 is available for investment?

c-3. $586,000 is available for investment?

http://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/marshall_11e/table6_4.png

http://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/marshall_11e/table6_5.png

Answer 1

Computation of the Present value of Project B using 1896 cost of Capital for Scott, Inc Computation of the Present value of Project C using 18% cost of Capital for Scott, Inc Cash Outflow Cash Outflow or Intial Investment $1,15,000 $0 S0 $0 Present Value of Cash inflow |Value of Cash inflow Cash InFlow Discount Rate Present Cash InFlow Discount Rate Year Year @18% @ 18% Investment $58,000 $33,053 $28,010 $23,735 $20,116 $17,047 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.266 0.2255$3,134 0.1911 39,000 39,000 $39,000 39,000 39,000 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.266 0.2255 0.1911 $26,000 $26,000 $26,000 S13,900 $13,900 $13,900 $13,900 $13,900 $15,824 13,411 $11,365 $5,149 $4,363 $3,697 S0 $0 S0 $0 S0 10 $2,656 10 $58,000 $1,47,500 $59,599 $1,15,000 $1,95,000 Total Total $1,21,961 Intial Investment (A) $58,000 Present Value of Cash Inflow (B) 59,599 Net Present Value (B-A) $59,599- $58,000 $1,599 Intial Investment (A) $115,000 Present Value of Cash Inflow (B) $121,961 Net Present Value (B-A) $121,961 $115,000 $6,961

Computation of the Present value of Project D using 1896 cost of Cap 1 for Scott, Inc Computation of the Present value of Project E using 18% cost of Capital for Scott, Inc Cash InFlow Discount Rate Present inflow Cash Outflow Cash Outflow or Intial Investment $2,32,000 $0 SO $0 $0 Present Value of Cash inflow Cash InFlow Discount Rate Year |Value of Cash Year @18% @ 18% Investment $1,16,000 $11,600 23,200 $34,800 $46,400 $58,000 $9,831 $16,662 $21,179 $23,933 S25,352 $75,000 75,000 $41,000 $41,000 41,000 $41,000 $41,000 $41,000 $41,000 $41,000 $63,563 $53,865 $24,953 $21,148 $17,921 $15,186 $12,870 $10,906 $9,246 $7,835 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.266 0.2255 0.1911 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.266 0.2255 0.1911 4 $0 6 $0 $0 10 10 $1,16,000 $1,74,000 $96,957 $2,32,000 $4,78,000 $2,37,492 Total Total Intial Investment (A) $232,000 Present Value of Cash Inflow (B) $237,492 Net Present Value (B-A) $237,492 $232,000 $5,492 Intial Investment (A) $116,000 Present Value of Cash Inflow (B) 96,957 Net Present Value (B-A) $96,957 $116,000 ($ 19,043)

computation of the Present value of Project A using 18% cost of capital for Scott, Inc Cash Outflow Present Value of Cash inflow Discount Rate or Intial Cash InFlow Year @ 18% Investment $54,000 $0 $13,000 $13,000 $13,000 $13,000 $13,000 $13,000 $13,000 $13,000 $13,000 $13,000 0 $11,018 $9,337 $7,912 $6,705 $5,682 $4,815 $4,081 $3,458 $2,932 $2,484 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704 0.3139 0.266 0.2255 0.1911 $0 $0 2 4 $0 $0 10 $1,30,000 $58,423 $54,000 Total Intial Investment (A) $54,000 Present Value of Cash Inflow (B) $58,423 Net Present Value (B-A) -$58,423 $54,000 $4,423

Solution b: Computation of Present Value ratio for Projet B, C, D, E Present Value Ratio Present Value of Cash Inflow/Intial Investment Computation Present Value Ratio Project| 1.028 Project C Present Value Ratio-$121,961/$115,000 Project D Present Value Ratio $96,957/$ 116,00 Project EPresent Value Ratio $237,492/$ 232,000 0.836 1.024 Solution c: c-1 If $120,000 is available for Investment will recomment Project C c-2 If $ 353,000 is available for Investment c-3 If $586,000 is available for Investment will recomment Project C, Project E, Project A, & Project B will recomment Project C & Project E