Wednesday 7 August 2013

Labeau Products, Ltd., of Perth, Australia, has $14,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: (Ignore income taxes.) Invest in Project X Invest in Project Y Investment required $14,000 $14,000 Annual cash inflows $6,000 Single cash inflow at the end of 9 years $68,000 Life of the project 9 years 9 years The company's discount rate is 16%. To determine the appropriate discount factor(s) using tables, click here to viewExhibit 12B-1andExhibit 12B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem. Required: (1) Determine the net present value. (Round your answer to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Net Present Value Project X $ Project Y $ (2) Which investment would you recommend that the company accept?


Labeau Products, Ltd., of Perth, Australia, has $14,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: (Ignore income taxes.)



Invest in
Project X
Invest in
Project Y
  Investment required
$14,000    
$14,000    
  Annual cash inflows
$6,000    

  Single cash inflow at the end of 9 years

$68,000    
  Life of the project
9 years    
9 years    

 
The company's discount rate is 16%.

To determine the appropriate discount factor(s) using tables, click here to view Exhibit 12B-1 and Exhibit 12B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.

Required:

(1)
Determine the net present value. (Round your answer to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)


Net Present
Value
  Project X
$13,642 correct   
  Project Y
$3,884 correct   

 
(2)
Which investment would you recommend that the company accept?



Project X correct

Explanation:
(1)
Item
Year(s)
Amount of
Cash Flows
16%
Factor
Present
Value of
Cash Flows
  Project X:




     Investment
Now
$(14,000)   
1.000    
$(14,000)   
     Annual cash inflow
1-9
$6,000    
4.607    
27,642    
     Net present value



$13,642    
  Project Y:




     Initial investment
Now
$(14,000)   
1.000    
$(14,000)   
     Single Cash inflow
9
$68,000    
0.263    
17,884    
     Net present value



$3,884   


(2)
Project X should be selected since it has a higher net present value.

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