FIN 486 CART Become Exceptional--fin486cart.com FIN 486 Entire Course - Page 16

P10–2 Payback comparisons Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternative ones. The first machine requires an initial investment of $14,000 and generates annual after-tax cash inflows of $3,000 for each of the next 7 years. The second machine requires an initial investment of $21,000 and provides an annual cash inflow after taxes of $4,000 for 20 years. a. Determine the payback period for each machine. b. Comment on the acceptability of the machines, assuming that they are independent projects. c. Which machine should the firm accept? Why? d. Do the machines in this problem illustrate any of the weaknesses of using payback? Discuss. P10–7 Net present value: Independent projects Using a 14% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable. P10–10 NPV: Mutually exclusive projects Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm’s cost of capital is 15%. • a. Calculate the net present value (NPV) of each press. • b. Using NPV, evaluate the acceptability of each press. • c. Rank the presses from best to worst using NPV. • d. Calculate the profitability index (PI) for each press. • e. Rank the presses from best to worst using PI. P10–14 Internal rate of return For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that the firm could have and still find the IRR acceptable. Project A Project B Project C Project D Initial investment (CF0) $90,000 $490,000 $20,000 $240,000 Year (t) Cash inflows (CFt) 1 $20,000 $150,000 $7,500 $120,000 2 25,000 150,000 7,500 100,000 3 30,000 150,000 7,500 80,000 4 35,000 150,000 7,500 60,000 5 40,000 — 7,500 — P10–21 All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of $150,000. The company’s board of directors has set a maximum 4-year payback requirement and has set