You are the head of the project selection team at Broken Arrow records. Your team is considering three different recording projects. Based on past history, Broken Arrow expects at least a rate of return of 20 percent. Your financial advisors predict inflation to remain at 2 percent into the foreseeable future. Given the following information for each project, which one should be Broken Arrow's first priority? Should Broken Arrow fund any of the other projects? If so, what should be the order of priority based on return on investment? Please show your work. Recording project : Time Fades Away
Year Investment Revenue Stream
0 $600,000 0
1 600,000
2 75,000
3 20,000
4 15,000
5 10,000
Recording project: On the Beach
Year Investment Revenue Stream
0 $400,000 0
1 400,000
2 100,000
3 25,000
4 20,000
5 10,000
Recording project: Tonight's the Night
Year Investment Revenue Stream
0 $200,000 0
1 200,000
2 125,000
3 75,000
4 20,000
5 10,000

Tonight's the Night should be given the first priority because its NPV is the largest

On the Beach can be funded because its NPV is positive. Time Fades Away should not be funded because the NPV is negative

Explanation:

To determine which products to be invested in, the npv of each of the projects should be determined.

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

Time Fades Away

Cash flow in year 0 = $-600,000

Cash flow in year 1 = 600,000

Cash flow in year 2 = 75,000

Cash flow in year 3 =  20,000

Cash flow in year 4 =  15,000

Cash flow in year 5 = 10,000

I = 20%

NPV = $-25,090.02

On the Beach

Cash flow in year 0=  $-400,000

Cash flow in year 1 = 400,000

Cash flow in year 2 =  100,000

Cash flow in year 3 = 25,000

Cash flow in year 4 = 20,000

Cash flow in year 5 = 10,000

I = 20%

NPV =  $30,909.21

Tonight's the Night

Cash flow in year 0 = $-200,000

Cash flow in year  1 = 200,000

Cash flow in year 2 = 125,000

Cash flow in year 3 = 75,000

Cash flow in year 4 = 20,000

Cash flow in year 5=  10,000

I = 20%

NPV = $110,538.84

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.  

When choosing between positive NPV projects, choose the project with the highest NPV first because it is the most profitable.

Tonight's the Night should be given the first priority because its NPV is the largest

Time Fades Away shouldn't be accepted because the NPV is negative. The other two projects should be accepted

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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