Jacko Corporation has two projects in which it can invest.Project A has a $500,000 initial cost and will return $700,000 after tax in 4 years.Project B has a $300,000 initial cost and its after-tax returns will be $150,000 in year 1 and $200,000 in year 2.Using a 7 percent discount rate for evaluation, which project(s) should Jacko invest in?
A)Project A only
B)Project B only
C)Both projects
D)Neither project

Question

Quizplus · Accepted Answer

To determine which project(s) Jacko Corporation should invest in, we calculate the Net Present Value (NPV) for each project using the formula: NPV = $\sum \frac{R_t}{(1+i)^t} - C$, where $R_t$ is the cash inflow at time $t$, $i$ is the discount rate, and $C$ is the initial investment cost.For Project A:- Initial cost = $500,000- Return after 4 years = $700,000- NPV = $\frac{700,000}{(1+0.07)^4} - 500,000 \approx \frac{700,000}{1.3108} - 500,000 \approx 534,145 - 500,000 = 34,145$For Project B:- Initial cost = $300,000- Return in year 1 = $150,000, in year 2 = $200,000- NPV = $\frac{150,000}{(1+0.07)^1} + \frac{200,000}{(1+0.07)^2} - 300,000 \approx \frac{150,000}{1.07} + \frac{200,000}{1.1449} - 300,000 \approx 140,187 + 174,678 - 300,000 = 14,865$Both projects have positive NPVs, indicating that investing in either would add value to the company. Therefore, Jacko Corporation should invest in both projects.

Jacko Corporation Has Two Projects in Which It Can Invest