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    CH 14 Case

    Uploaded by

    McCoy Brough
    This document compares two investment opportunities, Products A and B, across several financial metrics. It analyzes the initial investment, revenues, costs, payback period, net present value, internal rate of return, and profitability index of each product. Based on the analyses, Product A has a shorter payback period, higher IRR and PPI, and is the preferred option according to payback period, IRR, and PPI. Product B has a higher NPV and is preferred under the NPV analysis. The discount rates analyzed are 16% and 18%.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd

    CH 14 Case

    Uploaded by

    McCoy Brough
    11 views7 pages
    This document compares two investment opportunities, Products A and B, across several financial metrics. It analyzes the initial investment, revenues, costs, payback period, net present value, internal rate of return, and profitability index of each product. Based on the analyses, Product A has a shorter payback period, higher IRR and PPI, and is the preferred option according to payback period, IRR, and PPI. Product B has a higher NPV and is preferred under the NPV analysis. The discount rates analyzed are 16% and 18%.

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    Acct 2020

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    This document compares two investment opportunities, Products A and B, across several financial metrics. It analyzes the initial investment, revenues, costs, payback period, net present value, internal rate of return, and profitability index of each product. Based on the analyses, Product A has a shorter payback period, higher IRR and PPI, and is the preferred option according to payback period, IRR, and PPI. Product B has a higher NPV and is preferred under the NPV analysis. The discount rates analyzed are 16% and 18%.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    11 views7 pages

    CH 14 Case

    Uploaded by

    McCoy Brough
    This document compares two investment opportunities, Products A and B, across several financial metrics. It analyzes the initial investment, revenues, costs, payback period, net present value, internal rate of return, and profitability index of each product. Based on the analyses, Product A has a shorter payback period, higher IRR and PPI, and is the preferred option according to payback period, IRR, and PPI. Product B has a higher NPV and is preferred under the NPV analysis. The discount rates analyzed are 16% and 18%.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 7

    Product A Product B Discount rate

    Initial investment: ROI


    Cost of equipment (zero salvage value) $ 170,000 $ 380,000
    Annual revenues and costs:
    Sales revenues $ 250,000 $ 350,000
    Variable expenses $ 120,000 $ 170,000
    Depreciation expense $ 34,000 $ 76,000
    Fixed out-of-pocket operating costs $ 70,000 $ 50,000

    1.) Payback period


    Net cash flow $ 60,000 $ 130,000
    Initial investment $ 170,000 $ 380,000
    Payback (years) 2.83 2.92
    Want product A

    2.) NPV A Factor


    Cost of equipment $ (170,000) 1 $ (170,000)
    Annual cash inflow $ 60,000 3.274 $ 196,440 yearly
    Salvage value 0 0.476 $ -
    NPV $ 26,440
    B
    Cost of equipment $ (380,000) 1 $ (380,000)
    Annual cash inflow $ 130,000 3.274 $ 425,620 yearly
    Salvage value $ - 0.476 $ -
    NPV $ 45,620
    Product B is preferred under NPV

    3.) IRR A B
    Payback period 2.83 2.92
    IRR ≈ 22.5% 21.5%
    Product A is preferred under IRR

    4.) Product Prof. Index A B


    NPV $ 26,440 $ 45,620
    initial investment $ 170,000 $ 380,000
    PPI 15.55% 12.01%
    Product A is preferred

    5.) Simple rate A B


    Sales revenues $ 250,000 $ 350,000
    Variable expenses $ (120,000) $ (170,000)
    Depreciation expense $ (34,000) $ (76,000)
    Fixed out-of-pocket operating costs $ (70,000) $ (50,000)
    Net op income $ 26,000 $ 54,000
    Initial investment $ 170,000 $ 380,000
    Simple ROR 15.29% 14.21%
    Product A is preferred
    Discount rate 16%
    18%
    $ 1,350 $ 2.00 675 Washes weekly 35100 0.2
    $ 405 $ 1.00 405 Vacuum weekly 21060 0.1
    $ 1,755

    Lease $ 1,700

    1.) Yearly cash recipts


    Sales $ 91,260
    Rent $ 20,400
    Fixed
    Cleaning $ 5,400
    Insurance $ 900
    Maint. $ 1,000
    Variable
    Wash $ 7,020
    Vacuum $ 2,106

    Cash flow $ 54,434

    2.) NPV Factor


    Cost of equipment $ 200,000 1 $ (200,000)
    Annual cash inflow $ 54,434 3.791 $ 206,359
    Salvage value $ 20,000.0 0.621 $ 12,420
    NPV $ 18,779
    I would advise to open the wash
    $ 7,020
    $ 2,106

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