The Tearess Company Can Accept Either Proposal a or Proposal

question 57

Essay

The Tearess Company can accept either Proposal A or Proposal B (but not both), or it can reject both investment proposals. Proposal A requires an investment of $7000 and promises increased net cash inflows of $2600 for five years. Proposal B requires an investment of $7000 and promises increased net cash inflows of $3000 in each of the first three years, $2000 in the fourth year and $2200 in the fifth year. The company's minimum acceptable rate of return is 20%.
Prepare an analysis to determine which (if either) of the proposals should be selected for investment.
Discount factors for 20%:

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Definitions:

Firm's Output

The total quantity of goods or services produced by a company within a specific period.

Short Run

Refers to a time period in which at least one input (e.g., capital) is fixed, limiting the ability of a business to adjust to changes in market demand or production costs.

Firm's Output

The total quantity of goods or services produced by a company.

Break-Even Point

The juncture where a business's total expenses match its total income, resulting in neither a profit nor a loss.