Chichester Company Is Considering Investing in the Following Two Mutually

question 76

Essay

Chichester Company is considering investing in the following two mutually exclusive projects:
$$\begin{array}{l}\text { Annual cash Inflows }\\\begin{array} { c r r } \text { Year } & \text { Project A } & \text { Project B} \\1 & \$ 5,000 & \$ 3,500 \\2 & 4,000 & 3 , 500 \\3 & 3,000 & 3, 500 \\4 & 2,000 & 3, 500 \\\text { Total } & \$ 14,000 & \$ 14,000\end{array}\end{array}$$ (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 10%.What is the maximum amount Chichester should be willing to pay for each project?Suppose each project costs $10,000. Which project(s) should be accepted?

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Definitions:

Monitoring

The act of overseeing or checking on the progress or quality of a project, process, or performance of employees systematically.

Screening

The process of evaluating or analyzing something to determine its suitability, quality, or condition, often before further consideration or involvement.

Employee Productivity

A measure of output per hour or per employee, indicating the efficiency of workers in a company or sector.

Moral Hazard

A situation in which one party takes greater risks because someone else bears the cost of those risks.