ATG212Chapter12Solutions

ATG212Chapter12Solutions - Brief Exercise 12-2(20 minutes...

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Brief Exercise 12-2  (20 minutes) Item Year(s) Amount of  Cash  Flows 16%  Factor Present  Value of  Cash  Flows Project A: Investment required.. Now $(15,000) 1.000 $(15,000) Annual cash inflows.. 1-10 $4,000 4.833       19,332     Net present value ...... $       4,332     Project B: Investment required.. Now $(15,000) 1.000 $(15,000) Single cash inflow ..... 10 $60,000 0.227       13,620     Net present value ...... $ (1,380 ) Project A should be selected. Project B does not provide the required  16% return, as shown by its negative net present value.
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Brief Exercise 12-3  (15 minutes) 1. The project profitability index for each proposal is: Proposal  Net Present  Value  (a) Investment  Required  (b) Project  Profitability  Index  (a)  ÷  (b) A $34,000 $85,000 0.40 B $50,000 $200,000 0.25 C $45,000 $90,000 0.50 D $51,000 $170,000 0.30 2. The ranking would be: Proposal  Project  Profitability  Index C 0.50 A 0.40 D 0.30 B 0.25 Note that proposal D has the highest net present value, but it ranks  third in terms of the project profitability index.
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Brief Exercise 12-4  (15 minutes) 1. The payback period is determined as follows: Year Investment Cash  Inflow Unrecovered  Investment 1 $38,000 $2,000 $36,000 2 $6,000 $4,000 $38,000 3 $8,000 $30,000 4 $9,000 $21,000 5 $12,000 $9,000 6 $10,000 $0 7 $8,000 $0 8 $6,000 $0 9 $5,000 $0 10 $5,000 $0 The investment in the project is fully recovered in the 6th year. To  be more exact, the payback period is approximately 6.9 years.
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