Carlyle Inc. is considering two mutually exclusive projects. Both require an initial investment of
$15,000 at t = 0. Project S has an expected life of 2 years with after-tax cash inflows of $7,000
and $12,000 at the end of Years 1 and 2, respectively. Project L has an expected life of 4 years
with after-tax cash inflows of $5,200 at the end of each of the next 4 years. Each project has a
WACC of 9.00%, and neither can be repeated. The controller prefers Project S, but the CFO
prefers Project L. How much value will the firm gain or lose if Project L is selected over Project S,
i.e., what is the value of NPVL - NPVS?
a. $262.74
b. $291.93
c. $324.37
d. $356.80
e. $392.48
Foley systems is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project'S 3 years life, would have a zero salvage value, and would require no additional net operating working capital. Revenues and operating costs are expected to be constant over the project'S life.. the tax rate is 34%. What is the NPV,IRR, AND probability index?
Cost of capital. 10%
Net investment. 75,000
Revenue. 75,000
Other options costs. 25,000
Depreciation rate. 33.33%
Tax rate. 35%
To find the value of NPVL - NPVS, we need to calculate the NPV (Net Present Value) for both projects separately and then subtract NPVS from NPVL.
To calculate the NPV of a project, we use the following formula:
NPV = CF0 + (CF1 / (1 + WACC)^1) + (CF2 / (1 + WACC)^2) + ... + (CFn / (1 + WACC)^n)
Where:
- CF0 represents the initial cash outflow (negative) at t = 0.
- CF1, CF2, ... CFn represents the cash inflows (positive) at the end of each period.
- WACC is the weighted average cost of capital, which is 9.00% in this case.
- n is the number of periods or the project's expected life.
Let's calculate the NPVS first:
NPVS = -15000 + (7000 / (1 + 0.09)^1) + (12000 / (1 + 0.09)^2)
Simplifying this calculation, we get:
NPVS ≈ -15000 + 6380.73 + 10947.53 ≈ -15000 + 17328.26 ≈ $2328.26
Now let's calculate the NPVL:
NPVL = -15000 + (5200 / (1 + 0.09)^1) + (5200 / (1 + 0.09)^2) + (5200 / (1 + 0.09)^3) + (5200 / (1 + 0.09)^4)
Simplifying this calculation, we get:
NPVL ≈ -15000 + 4763.31 + 4368.42 + 4007.82 + 3670.51 ≈ -15000 + 16810.06 ≈ $1810.06
Finally, we can calculate the value of NPVL - NPVS:
Value = NPVL - NPVS ≈ $1810.06 - $2328.26 ≈ -$518.2
Since the value is negative, it means that the firm will lose $518.2 if Project L is selected over Project S.
Therefore, the correct answer is not provided in the options.