Explore BrainMass
Share

NPV & Profitability - Western Tool Company

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

John Piderit, the general manager of the Western Tool Company, is considering introducing some new tools to the company's product line. The top management of the firm has identified three types of tools (referred to as projects A, B, and C). The various divisions of the firm have provided the data given in the following table on these three possible projects. The company has a limited capital budget of $2.4 million for the coming year. (a) Which project(s) would the firm undertake if it used the NPV investment criterion? (b) Is this the correct decision? Why?

Project A Project B Project C
Present Value of net cash $3,000,000 $1,750,000 $1,400,000
Flows (PVNCF)
Initial cost of project (C0) $2,400,000 $1,300,000 $1,100,000
NPV = PVNCF - C0 $ 600,000 $ 450,000 $ 300,000

PI = PVNCF
C0 1.3 1.3 1.3

* Remember the firm has a limited capital budget of $2.4 million for the coming year. In other words, the firm faces the capital rationing, see pp. 589-592. Use the profitability index as its investment criterion.

© BrainMass Inc. brainmass.com October 16, 2018, 8:59 pm ad1c9bdddf
https://brainmass.com/economics/personal-finance-savings/npv-profitability-western-tool-company-168323

Attachments

$2.19
Similar Posting

(a) Which project(s) would the firm undertake if it used the NPV investment criterion?
(b) Is this the correct decision? Why?

8. The general manager of the Western Tool Company is considering introducing some new tools to the company's product line. The top management of the firm has identified three types of tools (referred to as Project A, B, and C). The various divisions of the firm have provided the data given in the following table on these three possible projects. The company has a limited capital budget of $2.4 million for the coming year.
(a) Which project(s) would the firm undertake if it used the NPV investment criterion?
(b) Is this the correct decision? Why?
Project A Project B Project C
Present value of net cash flows (PVNCF) $3,000,000 1,750,000 1,4000,000
Initial cost of project $2,400,000 1,300,000 1,100,000

View Full Posting Details