Redmond Company Is Considering Investing in One of the Following

question 89

Essay

Redmond Company is considering investing in one of the following two projects: $$\begin{array}{l}\text {Annual Cash Inflows }\\\begin{array} {| l | l | l | } \hline \text {Year }&\text {Project A }&\text { Project B}\\\hline 1&\$2,000&\$4,000\\\hline 2&3,000&2,000\\\hline 3&3,000&2,000\\\hline 4&1,000&1,000\\\hline\text { Total}&\$9,000&\$9,000\\\hline\end{array}\end{array}$$
Required:
1) Which project is more desirable strictly in terms of cash inflows? Why?
2) Compute the present value of each project's cash inflows assuming the company's required rate of return is 12%.
3) What is the maximum amount Redmond should be willing to pay for each project?
4) 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:

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