Chandler tire co. is trying to decide which one of two projects it should accept. both projects have the same start-up costs. project 1 will produce annual cash flows of $52,000 a year for six years. project 2 will produce cash flows of $48,000 a year for eight years. the company requires a 15 percent rate of return. which project should the company select and why? rev: 09_30_2016_qc_cs-63898 project 1, because the annual cash flows are greater by $4,000 than those of project 2 project 1, because the present value of its cash inflows exceeds those of project 2 by $14,211.62 project 2, because the total cash inflows are $72,000 greater than those of project 1 project 2, because the present value of the cash inflows exceeds those of project 1 by $18,598.33 it does not matter as both projects have almost identical present values.

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Boss

Business

23 March, 13:28

Chandler tire co. is trying to decide which one of two projects it should accept. both projects have the same start-up costs. project 1 will produce annual cash flows of $52,000 a year for six years. project 2 will produce cash flows of $48,000 a year for eight years. the company requires a 15 percent rate of return. which project should the company select and why? rev: 09_30_2016_qc_cs-63898 project 1, because the annual cash flows are greater by $4,000 than those of project 2 project 1, because the present value of its cash inflows exceeds those of project 2 by $14,211.62 project 2, because the total cash inflows are $72,000 greater than those of project 1 project 2, because the present value of the cash inflows exceeds those of project 1 by $18,598.33 it does not matter as both projects have almost identical present values.

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Krista Fox · Answer 1

The answer for this question is D. Project 2; because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

Explanation:

Project 1: You find the factor in the PV (annuity) table corresponding to rate = 15% and time periods = 6. That factor is 3.784. Multiply by the amount of annual cash inflow:

Net Present Value (Project 1) = (3.784 x $52,000) = $ 196,768

Project 2: You find the factor in the PV (annuity) table corresponding to rate = 15% and time periods = 8. That factor is 4.487.

Net Present Value (Project 2) = (4.487 x $48,000) = $ 215,376

So Project 2 should be correct because it has the higher present value