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20 December, 11:36

Sunland Company is considering two capital investment proposals. Estimates regarding each project are provided below. Project Soup Project Nuts Initial Investment $600,000 $900,000 Annual Net Income $30,000 $63,000 Annual Cash Inflow $150,000 $213,000 Salvage Value $0 $0 Estimated Useful Life 5 years 6 years The company requires a 10% rate of return on all new investments. Part (a) : Calculate the payback period for each project. Part (b) : Calculate the net present value for each project. Part (c) : Which project should Carr Company accept and why?

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  1. 20 December, 11:50
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    a. 4 years and 4.22 years

    b. - $31,350 and $27,615

    c. Project Nuts

    Explanation:

    a. The formula to compute the payback period is shown below:

    = Initial investment : Net cash flow

    For project soup, it would be

    = $600,000 : $150,000

    = 4 years

    For project nuts, it would be

    = $900,000 : $213,000

    = 4.22 years

    b. The computation of the Net present value is shown below

    = Present value of all yearly cash inflows after applying discount factor - initial investment

    For project soup, it would be

    = $568,650 - $600,000

    = - $31,350

    The present value is computed below:

    = Annual cash flow * pvifa for 5 years at 10%

    = $150,000 * 3.791

    = $568,650

    For project nuts, it would be

    = $927,615 - $900,000

    = $27,615

    The present value is computed below:

    = Annual cash flow * pvifa for 6 years at 10%

    = $213,000 * 4.355

    = $927,615

    Kindly refer pvifa table

    c. The project Nuts should be accepted as it has positive net present value.
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