Chandler Tire Co.is trying to decide which one of two projects it should accept.Both projects have the same start-up costs.Project 1 will produce annual cash flows of $52,000 a year for six years.Project 2 will produce cash flows of $48,000 a year for eight years.The company requires a 15 percent rate of return.Which project should the company select and why?

Question

Quizplus · Accepted Answer

To determine which project to select, we need to calculate the present value of each project's future cash flows using a 15 percent rate of return.

For Project 1, we can use the formula for the present value of an annuity:

PV = C x [(1 - (1 / (1 + r)^n)) / r]

Where PV is the present value, C is the annual cash flow, r is the discount rate (15 percent), and n is the number of years. Plugging in the numbers, we get:

PV = $52,000 x [(1 - (1 / (1 + 0.15)^6)) / 0.15] 
PV = $205,476.46

For Project 2, we can use the same formula:

PV = $48,000 x [(1 - (1 / (1 + 0.15)^8)) / 0.15] 
PV = $224,074.79

Since Project 2 has a higher present value of cash flows, it should be selected. So, the answer is D.