Question

12 Homework Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows. a. Cobre Company is considering the purchase of new equipment that will speed up the process for extracting copper. The equipment will cost $4,200,000 and have a cash flows associated with the project are as follows: Year Cash Revenues Cash Expenses $6,000,000 $4,800,000 6,000,000 4,800,000 6,000,000 4,800,000 6,000,000 4,800,000 6,000,000 4,800,000 b. Emily Hansen is considering investing in one of the following two projects. Either project will require an investment of $75,000. The expected cash revenues minus depreciable. Project A Project B Year $22,500 $22,500 30,000 30,000 45,000 45,000 75,000 22,500 75,000 22,500 c. Suppose that a project has an ARR of 30% (based on initial investment) and that the average net income of the project is $120,000. d. Suppose that a project has an ARR of 50% and that the investment is $250,000.

Answer 1

Year | Cash Revenues (A) 60,00,000 60,00,000 60,00,000 60,00,000 60,00,000 60,00,000 Total Incomes Cash Expenses (B) Net Profit (A-B) | 48,00,000 12,00,000 48,00,000 12,00,000 48,00,000 12,00,000 48,00,000 12,00,000 48,00,000 12,00,000 48,00,000 12,00,000 72,00,000 Average Incomes = Total Incomes / No of years = $7,200,000 / 6 = $ 12,00,000 Initial Investment = $ 42,00,000 Solution 1. ARR (average rate of return) Average Incomes Initial Investments x100 = $ $ 12,00,000 42,00,000 X100 28.6% Solution 2. Particulars Initial Investments (A) Years: Project A 75,000 $ Project B 75,000 $ NM + in 22,500 30,000 45,000 75,000 75,000 2,47,500 49,500 66.00% 22,500 30,000 45,000 22,500 22.500 1,42,500 28,500 38.00% Totals Average ARR (B) C=(B/5) C/A x 100

As ARR of Project A > Project B, Project A should be accepted Solution 3. Initial Investment = Average Net income of Project ARR % = _ $120000 30% = $ 4,00,000 Solution 4. Average Net Income = Initial Investment x ARR% = $250,000 x 50% = $ 1,25,000

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