Question

Chandler tire co. is trying to decide which one of two projects it should accept. both projects have the same start-up costs. project 1 will produce annual cash flows of $52,000 a year for six years. project 2 will produce cash flows of $48,000 a year for eight years. the company requires a 15 percent rate of return. which project should the company select and why? rev: 09_30_2016_qc_cs-63898 project 1, because the annual cash flows are greater by $4,000 than those of project 2 project 1, because the present value of its cash inflows exceeds those of project 2 by $14,211.62 project 2, because the total cash inflows are $72,000 greater than those of project 1 project 2, because the present value of the cash inflows exceeds those of project 1 by $18,598.33 it does not matter as both projects have almost identical present values.

Answer 1

The answer for this question is D. Project 2; because the present value of the cash inflows exceeds those of Project 1 by $18,598.33
  Explanation:
 Project 1: You find the factor in the PV(annuity) table corresponding to rate = 15% and time periods = 6. That factor is 3.784. Multiply by the amount of annual cash inflow:
Net Present Value (Project 1) = (3.784 x $52,000) = $ 196,768

 Project 2: You find the factor in the PV(annuity) table corresponding to rate = 15% and time periods = 8. That factor is 4.487.
Net Present Value (Project 2) = (4.487 x $48,000) = $ 215,376

  So Project 2 should be correct because it has the higher present value

Answer 2

Answer:

The answer is " project 2, because the present value of the cash inflows exceeds those of project 1 by $18,598.33"

Explanation:

As the two projects are mutually exclusive ( must choose one of them, instead of two); the project with higher net present value will be chosen.

We have:

* Net present value of project 1 = (52,000/0.15) * [1 - 1.15^(-6)] - startup cost = 196,793.10 - startup cost;

* Net present value of project 2 = (48,000/0.15) * [1 - 1.15^(-8)] - startup cost = 215,391.43 - startup cost.

=> The difference between NPV of Project 2 and NPV of Project 1 is: 215,391 - startup cost - 196,793 + startup cost = $18,598.33

=> The right choice is: "project 2, because the present value of the cash inflows exceeds those of project 1 by $18,598.33"