Table 1: Financial analysis of Project A: Add a twin-jet to the companys fleet

Net cost of new plane

Additional revenue
Additional operating costs
Depreciation
Net increase in income
Less: Tax at 33%
Increase in aftertax income
Add back depreciation
Net change in cash flow

Table 2: Financial analysis of Project B: Diversify into copy machines

Net cost of new franchise
Additional revenue
Additional operating costs
Amortization
Net increase in income
Less: Tax at 33%
Increase in aftertax income
Add back depreciation
Net change in cash flow

Table 3: Financial analysis of Project C: Add a helicopter to the companys fleet

Net cost of new helicopter
Additional revenue
Additional operating costs
Depreciation
Net increase in income
Less: Tax at 33%
Increase in aftertax income
Add back depreciation
Net change in cash flow

Table 4: Financial analysis of Project D: Add fleet of trucks

Net cost of new trucks
Additional revenue

Additional operating costs

Depreciation
Net increase in income
Less: Tax at 33%
Increase in aftertax income
Add back depreciation
Net change in cash flow

n-jet to the companys fleet

Initial Expenditures
$300,000

($300,000)

into copy machines

Initial Expenditures
$700,000

($700,000)

copter to the companys fleet

Initial Expenditures
$800,000

($800,000)

Initial Expenditures
$510,000

Year 1

Year 3

Year 4

Year 5

$112,300
11,250
63,000
38,050
12,557
$25,494
$63,000
$88,494

$225,000
11,250
63,000
150,750
49,748
$101,003
$63,000
$164,003

$168,750
11,250
63,000
94,500
31,185
$63,315
$63,000
$126,315

Year 2

Year 3

Year 4

Year 5

$175,000
26,250
17,500
131,250
43,313
$87,938
$17,500
$105,438

$262,500
26,250
17,500
218,750
72,188
$146,563
$17,500
$164,063

$393,750
26,250
17,500
350,000
115,500
$234,500
$17,500
$252,000

$525,000
26,250
17,500
481,250
158,813
$322,438
$17,500
$339,938

Year 1

Year 2

Year 3

Year 4

Year 5

$100,000
40,000
120,000
-60,000
0
($60,000)
$120,000
$60,000

$200,000
40,000
176,000
-16,000
0
($16,000)
$176,000
$160,000

$300,000
40,000
168,000
92,000
30,360
$61,640
$168,000
$229,640

$450,000
40,000
168,000
242,000
79,860
$162,140
$168,000
$330,140

$600,000
40,000
168,000
392,000
129,360
$262,640
$168,000
$430,640

Year 1

Year 2

Year 3

Year 4

Year 5

$382,500

$325,125

$43,000
11,250
45,000
-13,250
0
($13,250)
$45,000
$31,750

Year 1
$87,500
26,250
17,500
43,750
14,438
$29,313
$17,500
$46,813

Year 2
$76,800
11,250
66,000
-450
0
($450)
$66,000
$65,550

$89,250

$76,500

$51,000

($510,000)

19,125
76,500
286,875
94,669
$192,206
$76,500
$268,706

19,125
112,200
193,800
63,954
$129,846
$112,200
$242,046

25,500
107,100
-43,350
0
($43,350)
$107,100
$63,750

31,875
107,100
-62,475
0
($62,475)
$107,100
$44,625

38,250
107,100
-94,350
0
($94,350)
$107,100
$12,750

Question 1

Refer to Tables 1 through 4. Add up the total increase in aftertax income for e
project.
Given what you know about Kay Marsh, to which project do you think she wi
attracted?
Year
Year
Year
Year
Year
Total

1
2
3
4
5

Project A Project B Project C Project D

13250
29313
60000
192206
450
87938
16000
129846
25494
146563
61640
43350
101003
234500
162140
62475
63315
322438
262640
94350
176112

820752

410420

121877

Given what we know about Kay Marsh, she will most likely be atrracted to Proj

ertax income for each

you think she will be

e atrracted to Project B

Question 2

Compute the payback period, internal rate of return (IRR), net present valu
profitability index of all four alternatives based on cash flow. Use 10% for the d
your calculations.
Project A
PayBack Period
Internal Rate of Return
Net Present Value
Profitability Index

Project B

Project C

Project D

net present value (NPV), and

Use 10% for the discount rate in

Question 3

a. According to the payback method, which proj

selected? b. What are the disadvantages of th

on 3

thod, which project should be

dvantages of this method?

Question 4

a. According to the IRR method, which project should be chosen?

b. What are the major disadvantages of the IRR method?
c. If Kay had not put a limit on the size of the c
the IRR method allow acceptance of all four alternatives? If not, wh
rejected and why?

on 4

hould be chosen?
of the IRR method?
mit on the size of the capital budget, would
lternatives? If not, which one(s) would be
d why?

Question 5

a. According to the NPV method, which project should be chosen? How

the answer under the IRR?
b. If Kay had not put a l
capital budget, under the NPV method which projects would be accep
IRR both reject the same project(s)? Why?
c. Giv
case, are you more likely to select Project A or C

on 5

hould be chosen? How does this differ from

If Kay had not put a limit on the size of the

ojects would be accepted? Do the NPV and
c. Given all the facts of the
o select Project A or C?