The Kitchen Inc.is considering the following 3 mutually exclusive projects.Projected cash flows for these ventures are as follows:
If the Kitchen has a 12% cost of capital,what decision should be made regarding the projects above?
A) Accept plan A
B) Accept plan B
C) Accept plan C
D) Accept Plans A, B and C

Question

The Kitchen Inc.is considering the following 3 mutually exclusive projects.Projected cash flows for these ventures are as follows:
 If the Kitchen has a 12% cost of capital,what decision should be made regarding the projects above?
A) Accept plan A 
B) Accept plan B 
C) Accept plan C 
D) Accept Plans A, B and C

Quizplus · Accepted Answer

To determine the best choice, we need to calculate the present value of each project's cash flows using a discount rate of 12%.

For Plan A: 
PV = -$30,000 + $8,000/(1.12) + $12,000/(1.12)^2 + $16,000/(1.12)^3 = $10,188.77

For Plan B: 
PV = -$60,000 + $14,000/(1.12) + $20,000/(1.12)^2 + $30,000/(1.12)^3 = $15,923.22

For Plan C: 
PV = -$90,000 + $20,000/(1.12) + $30,000/(1.12)^2 + $40,000/(1.12)^3 = $20,595.85

So, based on the present value calculations, the best choice would be Plan C as it has the highest present value of cash flows. Therefore, the decision should be to Accept Plan C.