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Question
Alabama Pulp Company (APC) can control its environmental pollution using either "Project Old Tech" or "Project New Tech." Both will do the job, but the actual costs involved with Project New Tech, which uses unproved, new state-of-the-art technology, could be much higher than the expected cost levels. The cash outflows associated with Project Old Tech, which uses standard proven technology, are less riskyu23afthey are about as uncertain as the cash flows associated with an average project. APC's required rate of return for average risk projects normally is set at 12 percent, and the company adds 3 percent for high risk projects but subtracts 3 percent for low risk projects. The two projects in question meet the criteria for high and average risk, but the financial manager is concerned about applying the normal rule to such cost-only projects. You must decide which project to recommend, and you should recommend the one with the lower PV of costs. What is the PV of costs of the better project?
Cash Outflows
Years: 0 1 2 3 4
Project New Tech 1,500 315 315 315 315
Project Old Tech 600 600 600 600 600
a. 2,521
b. 2,399
c. 2,457
d. 2,543
e. 2,422
Answer
This answer is hidden. It contains 487 characters.
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