Question

3. Two alternative projects have the following data in Table 1. Use the present worth method (PW) to determine which is the better alternative assuming "repeatability" and based on using GDS with depreciation, an income-tax rate of 40%, and an after-tax MARR of 10%. The following are relevant data: (20%) Table 1 Project B Project A S30,000 $20,000 First Cost MACRS Class Life 7years 12 Years 5 years 8 Years Useful Life $4000 Terminal MV $220,000 $200,000 Annual Receipts Annual Expenses$140,000 $150.00

Answer 1

1Explanation: Project having the higher NPV should be accepted in case of alternative proposals of project. Statemeni showing Net Present Value from the projects Project B 4 Project A Particulars Present Value Present Value Amount (S) PV Factor Amount (S)PV Factor 6 Cash Outflow: 7 First Cost 30000 30000 Total (A) 9 Cash Inflow: 10 Cash from operations 7.13 36914.29 263284.60 44400.00 5.80 257583.65 11 Terminal MV 0.3186 1274.52 4000 0.4665 0.00 Total (B) 264559.12 257583.65 13 14 Net Present Value 244559.12 227583.65 15 16 Since the Project A is having the higher NPV therefore it should be accepted 17 18 Working for above calculation is shown as hereunder: Statemeni showing Net Present Value from the projects Project B Project A Particulars Present Value Present Value Amount (S) PV Factor Amount (S)PV Factor 21 22 Cash Outflow B23 C23 E23 F23 23 First Cost 30000 -G23 Total (A) D23 25 Cash Inflow: --PV( 10%,8,1,1,0 26 Cash from operations |--PV(10%,12,1,1,0 -1/1.1A12 B26 C26 E26 *F26 842 1/1.1A8 27 Terminal MV B27 C27 E27 F27 Total (B) -SUM(D26:D27) -SUM(G26:G27)

29 30 Net Present Value -D28-D24 -G28-G24 31 32 Calculation for Cash from operations are shown as below: 34 Receipts 35 Expenses 36 Profits 140000 150000 60000 37 Depreciation 2285.71 6000.00 38 Profit before tax 57714.29 64000.00 39 Tax Expenses (40%) 23085.7143 25600 40 Profit after tax 34628.57 38400.00 41 Depreciation 2285.71 6000.00 42 Cash Flow from operations 36914.29 44400.00