Inatech Is Contemplating Two Different Projects and Decides to Perform

question 33

Essay

Inatech is contemplating two different projects and decides to perform a financial analysis to determine which is more financially lucrative.Project A and B have the cash flows as shown and Inatech uses a required rate of return of 10% and an inflation rate of 4%.Compute the payback in years and the net present value for both projects and offer advice as to the best course of action.
$$\begin{array} { | l | l | l |} \hline \text { Year } & \mathbf { A } & \mathbf { B } \\\hline 0 & - \$ 250,000 & -\$ 400,000 \\\hline 1 & \$ 75,000 & \$ 125,000 \\\hline 2 & \$ 155,000 & \$ 230,000 \\\hline 3 & \$ 200,000 & \$ 288,000 \\\hline 4 & \$ 175,000 & \$ 265,000 \\\hline 5 & \$ 160,000 & \$ 225,000 \\\hline\end{array}$$

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Definitions:

Deviation

The difference between a specific value and a reference point, often used in statistics to measure variability.

Capital Asset Pricing Model

A model that describes the relationship between systematic risk and expected return for assets, particularly stocks, for pricing risky securities.

Portfolio Risk

The degree of uncertainty of returns on a portfolio due to the possibility of changes in the value of its investments.

Well-diversified Portfolio

An investment portfolio constructed to spread risk across various asset classes and investment vehicles to minimize potential losses.