Peanut Co.has 2 projects in which it can invest.Project X has a $300,000 initial cost and will return $600,000 before tax in year 2.Project Y has $600,000 initial cost and will return $1,000,000 before tax in year 4.The company uses an 8 percent discount rate for project evaluation and its marginal tax rate is expected to be 21 percent in all years.Which project(s) should Peanut Co.invest in?
A)Project X only
B)Project Y only
C)Both projects
D)Neither project

Question

Quizplus · Accepted Answer

To determine which project(s) Peanut Co. should invest in, we calculate the Net Present Value (NPV) for each project. The NPV is calculated by discounting the future cash flows back to their present value and subtracting the initial investment.For Project X:- Initial investment: $300,000- Return in year 2: $600,000 before tax. After-tax return = $600,000 * (1 - 0.21) = $474,000- NPV = -$300,000 + ($474,000 / (1 + 0.08)^2) = $76,543.21For Project Y:- Initial investment: $600,000- Return in year 4: $1,000,000 before tax. After-tax return = $1,000,000 * (1 - 0.21) = $790,000- NPV = -$600,000 + ($790,000 / (1 + 0.08)^4) = -$13,586.78Project X has a positive NPV, indicating it is a profitable investment. Project Y has a negative NPV, indicating it is not a profitable investment. Therefore, Peanut Co. should invest in Project X only.

Peanut CoHas 2 Projects in Which It Can Invest