Evaluating alternative capital investments -“Jake’s Brewery”
The investment committee of Jake’s Brewery Inc. is evaluating two projects. The projects have different useful lives, but each requires an investment of $145,000. The estimated net cash flows from each project are as follows:
Year Project I Project II
1 40,000 55,000
2 40,000 55,000
3 40,000 55,000
4 40,000 55,000
5 40,000
6 40,000
The committee has selected a rate of 15% for purposes of net present value analysis. It is also estimated that the residual value at the end of each project’s lif is $0, but at the end of the fourth year, Project I’s residual value would be $60,000.
1) For each project, compute the net present value. (Ignore the unequal lives of the projects)
2) For each project, compute the net present value, assuming that Project I is adjusted to a 4-year life for purposes of analysis.
3) Prepare a report to the investment committee, providing your advice on the relative merits of the two projects
Please show all steps of this problem and then explain how the problem was solved.
(See complete problem in attachment)
