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Alex Ar [27]
3 years ago
5

. 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
Business
1 answer:
Alex787 [66]3 years ago
4 0

Answer:

So project two is better because it will increase the wealth of Chandler Tire by $ 18,598.33  more than Project 1

Explanation:

<em>To determine which project to be selected, we will compute the  present value (PV) of the two projects and select the  one with a higher PV.</em>

Present value is the today worth of the future cash inflows from a project. The higher the present value the more wealth is been created. So a project with a higher PV is better if two are been compared.

So when comparing two projects, the one with a higher PV is better.

<em>PV of Poject 1 </em>

PV = 52,000 × 1-(1.015)^(-6)

$196,793.10

<em>PV of Project 2</em>

PV = 48,000 × 1- (1.015)^(-8)

$215,391.43

So project two is better because it will increase the wealth of Chandler Tire by $ 18,598.33  more than Project 1

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Cash flows from activities include both inflows and outflows of cash from the external funding of a business.

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To assess the liquidity and solvency of the company, organizations should monitor and analyze three different types of cash flow:

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The cash flow statement of a corporation includes all three.

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