For discount factors use Exhibit 12B-1 and Exhibit 12B-2. Skiba Company is thinking about two...
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Accounting
For discount factors use Exhibit 12B-1 and Exhibit 12B-2.
Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow:
Year
Project I
Project II
0
$(100,000)
$(100,000)
1
63,857
2
134,560
63,857
Skiba's cost of capital is 12%.
Required:
1. Compute the NPV and the IRR for each investment. Round present value calculations and your final NPV answers to the nearest dollar. Round IRR answers to the nearest whole percent.
NPV
IRR
Project I
$fill in the blank 1
fill in the blank 2 %
Project II
$fill in the blank 3
fill in the blank 4 %
2. Conceptual Connection: Explain why the project with the larger NPV is the correct choice for Skiba.
NPV is an
absolute profitabilityrelative profitability
measure and reveals how much the value of the firm will change for each project. IRR gives a measure of
absolute profitabilityrelative profitability
. Thus, since NPV reveals the total wealth change attributable to each project, it is preferred to the IRR measure.
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