The Sawyer Corporation has $145,000 to invest and is considering two different projects, X and Y. The following data are available on the projects:

Project X | Project Y | |
---|---|---|

Cost of equipment needed now | $145,000 | |

Working capital requirement | – | $145,000 |

Annual cash operating inflows | $37,000 | $32,000 |

Salvage value in 5 years | $6,000 | – |

Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer’s discount rate is 9%.

The net present value of project Y is:

a. $58,590

b. $73,730

c. $8,221

d. ($8,221)

If the net present value of a project is greater than zero, the firm will earn a return greater than its cost of capital. The acceptance of such a project would enhance the wealth of the firm’s owners.

a. True

b. False

According to the present worth rule, a given stand-alone project should be accepted if its present worth is:

a) greater than the minimum attractive rate of return

b) smaller than the minimum attractive rate of return

c) equal to zero

d) smaller than zero

e) greater than zero

If the present worth of a stand-alone project is equal to zero, then all the below are correct statements, EXCEPT:

a) The project’s future value worth could be greater than zero.

b) The project adds zero value to the company.

c) Investors are indifferent between accepting and rejecting the project.

d) The project’s internal rate of return is equal to the minimum attractive rate of return.