Explore BrainMass

Explore BrainMass

    Capital Budgeting

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    I'm having problems with this problem. I'm getting the same response for both process A and B.

    Eagle Feather Company is considering investing in a new process which would improve manufacturing efficiency in the production of its principal product. The company can either invest in Process A for $150,000 which is easy to install and immediately begins to return cash back to the company, or Process B for $250,000 which is much more difficult to install but has the potential of returning greater cash flows in improved efficiencies. The after tax cash flows of the new processes are as follows:

    Process A Process B

    Initial Investment -$150,000 -$250,000

    Year 1 $ 45,000 $ 25,000
    Year 2 $ 55,000 $ 45,000
    Year 3 $ 65,000 $125,000
    Year 4 $ 75,000 $150,000
    Year 5 $ 85,000 $175,000

    a. If the company's Cost of Capital is 13%, what is the Payback, Net Present Value, and Profitability Index for each of these projects?

    b. The Controller has calculated that the Internal Rate of Return on Project A is 29% and on Project B is 22%. She wants to undertake Project A. What do you recommend based on your analysis?

    © BrainMass Inc. brainmass.com June 3, 2020, 9:52 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/npv-profitability-index-203514

    Solution Preview

    Please see the attached file.

    I'm having problems with this problem. I'm getting the same response for both process A and B.

    Eagle Feather Company is considering investing in a new process which would improve manufacturing efficiency in the production of its principal product. The company can either invest in Process A for $150,000 which is easy to install and immediately begins to return cash back to the company, or Process B for $250,000 which is much more difficult to install but has the potential of returning greater cash flows in improved efficiencies. The after tax cash flows of the new processes are as follows:

    Process A Process B

    Initial Investment -$150,000 -$250,000

    Year 1 $ 45,000 $ 25,000
    Year 2 $ ...

    Solution Summary

    The solution explains how to calculate Payback, Net Present Value, and Profitability Index for the given projects and make the acceptance/rejection decision based on IRR

    $2.19

    ADVERTISEMENT