Trevoline Company Is Deciding Between Two Projects

question 142

Essay

Trevoline Company is deciding between two projects. Each project requires an initial investment of $350,000. The projected net cash flows for the two projects are listed below. The revenue is to be received at the end of each year. Trevoline requires a 10% return on its investments. The present value of an annuity of $1 and present value of an annuity factors for 10% are presented below. Use net present value to determine which project should be pursued and explain why.
$$\begin{array} { l | l | l | l | l } & \text { Project A } & \text { Project B } & \text { Present Value } & \text { Present Value of an } \\\hline \text { Periods } & \text { Cash Flows } & \text { Cash Flows } & \text { of \$1 at } 10 \% & \text { Annuity of \$1 at } 10 \% \\\hline 1 & \$ 50,000 & \$ 160,000 & 0.9091 & 0.9091 \\\hline 2 & \$ 200,000 & \$ 175,000 & 0.8264 & 1.7355 \\\hline 3 & \$ 250,000 & \$ 175,000 & 0.7513 & 2.4869\end{array}$$

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Definitions:

Coefficient of Determination

A statistical measure, often denoted as R^2, that represents the proportion of the variance in the dependent variable that is predictable from the independent variable(s).

Independent Variables

Variables in an experiment or model that are manipulated or changed to observe their effect on dependent variables.

Total Variation

The overall measure of the spread or dispersion of a set of data points.

Degrees of Freedom

In statistical analysis, it refers to the number of independent values or quantities which can be assigned to a statistical distribution.