Larissa Soroka, an analyst at ABC company, has been asked to prepare cash flow forecasts for two mutually exclusive investment projects related to new products. ABC’s management asks Soroka to include the cost of market research that was recently completed as well as the potential loss of revenue from existing products that could occur if either project is undertaken. Soroka presents the forecast in Exhibit 1 and is asked to calculate IRR and NPV for both projects. Investors in ABC have a required rate of return of 8%.


Exhibit 1






Cash Flow Forecast for Projects A and B


Time
0
1
2
3
4




Project A
(18.5)
4.5
6.0
6.0
5.5


Project B
(33.5)
(2.5)
(1.0)
24.0
25.5




ABC’s management asks Soroka to consider in her forecast the impact of a six-month delay in all future cash flows and estimate the impact of that event on IRR and NPV.

After reviewing the forecast, ABC’s management asks Soroka to estimate ABC’s ROIC for 20X2. ABC earned operating profit of $8,830, had an effective tax rate of 22%, and reported the balance sheet in Exhibit 2.


Exhibit 2






ABC Balance Sheet
(end-of-period values)


Assets:
20X1

20X2




Cash
1,600

1,720


Short-term assets
30,450

29,910


Long-term assets
60,250

62,060


     Total assets
92,300

93,690








Liabilities and equity:
20X1

20X2




Accounts payable
12,930

11,620


Short-term debt
8,030

8,390


Long-term debt
25,040

25,910








Share capital
39,800

40,990


Retained earnings
6,500

6,780


     Total liabilities and equity
92,300

93,690




ABC’s management has an ROIC objective of at least 9.2% and asks Soroka for her recommendation about the projects.





Question


Q. Considering ABC management’s ROIC-based investment criterion and the IRR and NPV of both projects, Soroka should recommend to: