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Stephens Industries is contemplating four projects: Project P, Project Q, Project R, and Project S. The capital costs and estimated after- tax net cash flows of each project are shown in the table that follows. Stephens's after- tax cost of capital is 12 percent. Excess funds can-not be reinvested at greater than 12 percent.

Project Project Project Project P Q R S Initial cost $ 200,000 $ 235,000 $ 190,000 $ 210,000

Annual cash flows: Year 1 93,000 90,000 45,000 40,000

Year 2 93,000 85,000 55,000 50,000 Year 3 93,000 75,000 65,000 60,000

Year 4 0 55,000 70,000 65,000 Year 5 0 50,000 75,000 75,000 Net present value $ 23,370 $ 29,827 $ 27,233 $( 7,854)

Internal rate of 18.7% 17.6% 17.2% 10.6% return Profitability index 1.12 1.13 1.14 0.95

A. Which of the four projects are acceptable options? Why?

B. If only one project can be accepted, which one should the company choose?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9962807

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