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CH 14 Case

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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McCoy Brough
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35 views

CH 14 Case

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%.

Uploaded by

McCoy Brough
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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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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