Redmond Company Is Considering Investing in One of the Following

question 85

Essay

Redmond Company is considering investing in one of the following two projects:
$$\begin{array}{l}\text { Annual cash Inflows }\\\begin{array} { c r r } \text { Year } & \text { Project A} & \text { Project B} \\1 & \$ 2,000 & \$ 4,000 \\2 & 3,000 & 2,000 \\3 & 3,000 & 2,000 \\4 & 1,000 & 1,000 \\\hline \text { Total } & 9,000 & 9,000\end{array}\end{array}$$ (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required:Which project is more desirable strictly in terms of cash inflows? Why?Compute the present value of each project's cash inflows assuming the company's required rate of return is 12%.What is the maximum amount Redmond should be willing to pay for each project?Suppose each project costs $7,000. Which project(s) should be accepted? Note that only one project can be accepted.

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Definitions:

Maturity Value

The total amount that will be paid to an investor at the end of a bond's term or the face value plus any interest.

Note Receivable

A written promise for amounts to be received by a debtor, acknowledging a debt to be paid to the creditor at a future date.

Maturity Date

The specific date on which the principal amount of a bond, loan, or other financial instrument is due to be paid in full.

Note Dated

Indicates the specific date on which a note payable, receivable, or other legal financial document becomes effective.