The NPV of the newer truck is $80,658.īecause both trucks are acceptable projects but you can only drive one truck at a time, you must choose which truck to purchase. This newer truck will allow you to generate a cash inflow of $30,000 each year for the next six years. However, the truck is newer, with lower mileage, and you estimate that you can use it for six years. This truck is smaller and will not be able to hold as many frozen treats. The positive NPV of $49,474 for the project makes this an acceptable project.Īnother ice-cream truck is also for sale for $50,000. You estimate that the truck will last for three years, and you will be able to sell enough ice cream treats to generate a cash inflow of $40,000 during each of those years. You find that you can purchase a used truck for $50,000. Suppose you are considering starting an ice-cream truck business. Choosing between Projects with Different Lives ![]() 2 Why do you think the infrastructure investment for these games was so much higher than the amount spent by cities hosting previous games? If your city were discussing the possibility of bidding to be an Olympic host city, what would you suggest it consider when evaluating the opportunity? Check out this article for more information. The investment in infrastructure for the 2014 Winter Olympics in Sochi, Russia, was over $50 billion. These benefits come after the city makes a major investment in infrastructure, spending money on stadiums, housing, and transportation. The cities also expect indirect benefits from increased tourism, including increased employment and higher tax revenues. Olympic host cities receive direct revenues from broadcast rights, ticket sales, and licensing agreements. The investment analysis procedures used by companies are also used by government entities when evaluating projects. Because the NPV of a project is the estimate of how much value it will create, choosing the project with the higher NPV is choosing the project that will create the greater value. Remember that the goal is to choose projects that add value to the company. When faced with this type of decision, the rule is to take the project with the highest NPV. The question the managers face is which is the better of the two projects. When considered by themselves, each of the machines is a good project for Sam’s to pursue. Also, both machines have an IRR exceeding the company’s 9% cost of raising capital, also leading to decisions to accept the projects. Both machines have a positive NPV, leading to decisions to accept the projects. The heavy-duty machine costs $25,000, but it will generate more cash inflows in years 3 through 6. Table 16.11 shows the cash outflow and inflows expected from the original embroidery machine considered as well as the heavy-duty machine. Mutually exclusive projects compete with one another purchasing one embroidery machine excludes Sam’s from purchasing the other embroidery machine. ![]() The two embroidery machines are mutually exclusive projects. Although the initial cost of this heavy-duty machine is higher, it would allow Sam’s to embroider and sell more items each year, generating more revenue. However, another, more expensive embroidery machine may be available that is able to make more stitches per minute. Choosing between Mutually Exclusive ProjectsĮarlier in this chapter, we saw that the embroidery machine that Sam’s Sporting Goods was considering had a positive NPV, making it a project that Sam’s should accept. Sometimes, managers must make decisions regarding which of two projects to accept, or a company might be faced with a number of good, acceptable projects and have to decide which of those projects to take on during the current year. So far, we have considered methods for deciding to accept or to reject a single stand-alone project.
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