FIN 486 CART Become FIN 486 Entire Course - Page 17

its cost of capital at 9%. The cash inflows associated with the two projects are shown in the following table. Cash inflows (CFt) Year Project A Project B 1 $45,000 $75,000 2 45,000 60,000 3 45,000 30,000 4 45,000 30,000 5 45,000 30,000 6 45,000 30,000 a. Calculate the payback period for each project. b. Calculate the NPV of each project at 0%. c. Calculate the NPV of each project at 9%. d. Derive the IRR of each project. e. Rank the projects by each of the techniques used. Make and justify a recommendation. f. Go back one more time and calculate the NPV of each project using a cost of capital of 12%. Does the ranking of the two projects change compared to your answer in part e? Why? P11–1 Classification of expenditures Given the following list of outlays, indicate whether each is normally considered a capital expenditure or an operating expenditure. Explain your answers. LG 2 a. An initial lease payment of $5,000 for electronic point-of-sale cash register systems b. An outlay of $20,000 to purchase patent rights from an inventor c. An outlay of $80,000 for a major research and development program d. An $80,000 investment in a portfolio of marketable securities e. A $300 outlay for an office machine f. An outlay of $2,000 for a new machine tool g. An outlay of $240,000 for a new building h. An outlay of $1,000 for a marketing research report P11–4 Sunk costs and opportunity costs Masters Golf Products, Inc., spent 3 years and $1,000,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing them, the company will have to invest $1,800,000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $750,000 per year for the next 10 years. The company has determined that the existing line could be sold to a competitor for $250,000. a. How should the $1,000,000 in development costs be classified? b. How should the $250,000 sale price for the existing line be classified? c. Depict all the known relevant cash flows on a time line. P11–7 Book value Find the book value for each of the assets shown in the accompanying table, assuming that MACRS depreciation is being used. See Table 4.2 on page 120 for the applicable depreciation percentages. Asset Installed cost Recovery period (years) Elapsed time since purchase (years) A $ 950,000 5 3 B 40,000 3 1 C 96,000 5 4 D 350,000 5 1 E 1,500,000 7 5 P11–8 Book value and taxes on sale of assets Troy Industries