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Anni [7]
3 years ago
9

X-treme Vitamin Company is considering two investments, both of which cost $10,000. The cash flows are as follows:Year Project A

Project B1 $12,000 $10,0002 8,000 6,0003 6,000 16,000a) Which of the two projects should be chosen based on the payback method?b) Which of the two projects should be chosen based on the net present value method? Assume a cost of capital of 10 percent.c) Should a firm normally have more confidence in answer a or answer b?

Business
1 answer:
liq [111]3 years ago
8 0

Answer:

A) Project A = 0.83 year

B) NPV of Project B = $14,609.66

C) Answer B

Explanation:

Requirement A

We know,

Payback period = Last year with negative cumulative cash flows + (Absolute value of last year's cumulative cash flow ÷ Cash flow of the following year's negative cumulative cash flow)

Or, Payback period = A + ( B ÷ C)

                             Project A                                       Project B

Year   Cash Flow   Cumulative Cash Flow    Cash Flow  Cumulative Cash Flow

0 (A)   -$10,000      -$10,000 (B)                     -$10,000        -$10,000 (B)

1           $12,000 (C)      2,000                           $10,000(C)                 0

2              8,000         10,000                               6,000             6,000

3              6,000         16,000                              16,000           22,000

Payback period for project A = 0 + ($10,000 ÷ 12,000) = 0 + 0.833 = 0.83 year

Payback period for project B = 0 + ($10,000 ÷ 10,000) = 0 + 1 = 1 year

X-treme Vitamin Company should choose project A because it can return the investment earlier than project B.

Requirement B

We can use excel to find the Net Present Value for both the projects with a cost of capital of 10%.

The following image shows the NPV for project A and B.

From the calculation of NPV, X-treme Vitamin Company should choose project B as that project yields more present cash flows.

Requirement C

A firm should generally have more confidence in answer b because money can produce more logical sense than a year. Yes, it is easy to understand how many years a company will need to get back its cash flow. Still, the present value of cash flows provides a more specific evaluation of how to utilize the initial investment.

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Answer:

C. health maintenance organizations

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ATech has fixed costs of $7 million and profits of $4 million. Its competitor, ZTech, is roughly the same size and this year ear
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8 0
3 years ago
It costs a publishing company $50,000 to make books. The $50,000 is a fixed cost or a cost that cannot change. To help the publi
MariettaO [177]

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10,000 books

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Fixed Costs: $50,000

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We can solve break even (BE) by using the following formula:

BE = (Fixed Cost) / (Sale price-Variable costs)

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I hope this helps!

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5 0
3 years ago
Last year, you purchased a stock at a price of $60.00 a share. Over the course of the year, you received $2.90 per share in divi
zalisa [80]

Answer:

Real rate of return= 13.7%

Explanation:

<em>The return on investment is the sum of the dividends earned and capital gains made during the holding period of the investment. </em>

<em>Dividend is the proportion of the profit made by a company which is paid to shareholders.  </em>

<em>Capital gains is another type of the return made on an equity investment as a result of increase in the value of the shares. It is difference between the cost of the share and the value at the time of disposal. </em>

<em>Therefore, we can can compute the return on the investment as follows: </em>

The total return = (2.90) + (65.60-60)= 8.5

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Real total return ($) =  8.5/1.034=8.220

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3 0
3 years ago
Read 2 more answers
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