Cash inflow—2021 20,000 Cash inflow—2022 8,000 Cash inflow—2022 30,000 Cash inflow—2023 8,000 Cash inf
The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm’s weighted average cost of capital is 8%. Data for each project are as follows:
| Black | White | |||
Cost of investment—end 2020 |
25,000 |
|
Cost of investment—end 2020 |
$43,000 |
|
|
8,000 |
|
Cash inflow—2021 |
20,000 |
|
Cash inflow—2022 |
8,000 |
|
Cash inflow—2022 |
30,000 |
|
Cash inflow—2023 |
8,000 |
|
Cash inflow—2023 |
10,000 |
|
Cash inflow—2024 |
8,000 |
|
Cash inflow—2024 |
0 |
|
Cash inflow—2025 |
8,000 |
|
Cash inflow—2025 |
0 |
Requirements:
- Compute the
net present value for each asset using Excel's NPV function. - Determine which project the Riverside Company should invest in based on NPV.
- Compute the profitability index for each project.
- Determine which project the Riverside Company should invest in based on the profitability index.
- Should the firm invest in the Black or White project? What is the basis for your choice?
Problem 4–2
Ontario, Inc. establishes a 5% hurdle rate for its investment projects. The firm is considering three projects: X, Y, and Z at the end of its fiscal year. Ontario, Inc. has sufficient funds to finance all of these independent projects at the beginning of the new year.
|
|
X |
Y |
Z |
|
Cost of investment |
$200,000 |
$300,000 |
$250,000 |
|
|
15,000 |
10,000 |
20,000 |
|
Cash outflow—year 2 |
5,000 |
10,000 |
30,000 |
|
|
|
|
|
|
Cash inflow—year 1 |
40,000 |
46,000 |
75,000 |
|
Cash inflow—year 2 |
40,000 |
50,000 |
73,000 |
|
Cash inflow—year 3 |
40,000 |
44,000 |
71,000 |
|
Cash inflow—year 4 |
40,000 |
48,000 |
69,000 |
|
Cash inflow—year 5 |
40,000 |
52,000 |
67,000 |
|
Cash inflow—year 6 |
40,000 |
56,000 |
65,000 |
Required: Using Excel and its appropriate formula, compute the
Problem 4–4
Redlands Inc. made the following investments on January 1, 2020, its first year of business:
Item Cost Expected Life Cost Allocation
Warehouse $100 20 years Straight-line
Machine 60 10 years Double-declining
Patent 20 5 years Straight-line
Invest in stock* 10 Indefinite Not applicable
* Rancho’s stock had a fair (market) values of $8 and $7 on December 31, 2020 and December 31, 2021, respectively.
Required (A):
1. Present the
2. Report the book values of the long-term assets on the December 31, 2020 balance sheet.
Required (B):
1. Compute the gain or loss on the sale of the warehouse if Redlands sold it for $111 on January 1, 2021.
2. Compute the impairment loss on the machine if Redlands determined it had a fair value of $45 on January 1, 2021.
3. Compute 2021 amortization expense for the patent if Redlands determined the patent only had two more years of useful life on January 1, 2021.
4. Report the book values of the long-term assets on the December 31, 2021 balance sheet.
“Since you have asked multiple question, we will solve the first question for you. If you want any specific question to be solved then please specify the question number or post only that question.”
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
