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Step by Step Solution Please _ Chegg.com

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Here's the best solution from Chegg's library

Solution

Answered by
Accounting expert

1st step All steps Answer only

Step 1

Incremental cash ows :

(Annual Benefit × PVAF)- First Cost


PVAF = Present value of Annuity Factor= 1.10
1 1
+ 1.102 +
1
…… + 1
= 6.1445
1.103 1.1010
Project 1 = 39,000 × 6.1445 − 220,000 = 19,635.5
Project 2 = 15,000 × 6.1445 − 100,000 = −7,832.5
Project 3 = 51,000 × 6.1445 − 265,000 = 48,369.5
Project 4 = 26,000 × 6.1445 − 180,000 = −20,243

Since Projects 1 & 3 have positive net incremental cash ows they should be selected.

a. Total Cash Flow Approach


Project A = 2,100 × 8 + 1,000 − 10,700 = 7,100
Project B = (1,800 × 4 + 500 − 5,500) × 2 = 4,400

Explanation:

Since project B can be repeated, it multiplied it by 2 so as to get a comparable life of 8 years

Step 2

Incremental Cash Flow Approach

Project A
1
= 2,100 × PVAF(12%, 8) + 1,000 × 1.128
− 10,700 = 2,100 × 4.9676 + 1,000 × 0.4039 − 1
Project B
1
= 1,800 × PVAF(12%, 4) + 500 × 1.128
− 5,500 = 1,800 × 3.0373 + 500 × 0.6355 − 5,500
Project B can be repeated.
So after 4 years, it can repeat Project B which will give us a net incremental cash ow of 284.89 a

So after discounting its get


284.89
1.124
= 181.0152

Explanation:

So total Increamental cash ow = 284.89 + 181.052 = 465.942

Answer

It can be seen that in the case of the total cash ow approach Project A is way better than Proje
approach Project B is better than Project A.

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