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The Fun Foods Corp




The Fun Foods Corp. must decide on what new product line to introduce next year. After-tax cash flows are listed below along with initial investments. The firm's cost of capital is 12% and its target accounting rate of return is 20%. Assume straight-line depreciation and an asset life of five years. The corporate tax rate is 35%. All projects are independent.;Project Investment Year 1 2 3 4 5;A $5,000 $800 $1,000 $350 $1,250 $3,000;B $7,500 $1,250 $3,000 $2,500 $5,000 $5,000;C $4,000 $600 $1,200 $1,200 $2,400 $3,000;a. Calculate the accounting rate of return on the project. Which projects are acceptable according to this criterion? (Note: Assume net income is equal to after-tax cash flow less depreciation);b. Calculate the payback period. All projects with a payback of fewer than 4 years are acceptable. Which are acceptable according to this criterion?;c. Calculate the projects' NPVs. Which are acceptable according to this criterion?;d. Calculate the projects' IRRs. Which are acceptable according to this criterion?;e. Which projects should be chosen?


Paper#35435 | Written in 18-Jul-2015

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