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

Answer 1

Answer:

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

Explanation:

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.

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.

PV of Poject 1

PV = 52,000 × 1-(1.015)^(-6)

$196,793.10

PV of Project 2

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