E12-27A Calculate NPV-equal annual cash inflows (Learning Objective 4.docx - E12-27A Calculate NPV-equal annual cash inflows(Learning Objective 4 Use

# E12-27A Calculate NPV-equal annual cash inflows (Learning Objective 4.docx

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E12-27A Calculate NPV-equal annual cash inflows (Learning Objective 4) Use the NPV method to determine whether Vargas Products should invest in the follo ing projects: Project A costs \$280,000 and offers eight annual net cash inflows of \$56,000. Vare Products requires an annual return of 16% on projects like A Project B costs \$380,000 and offers nine annual net cash inflows of \$74,000. Vargas Products demands an annual return of 12% on investments of this nature. Requirement What is the NPV of each project? What is the maximum acceptable price to pay for each project? E12-28A Calculate IRR-equal cash inflows (Learning Objective 4) Refer to Vargas Products in E12-27A. Compute the IRR of each project and use this infor- mation to identify the better investment. E12-29A Calculate NPV- unequal cash flows (Learning Objective 4) Walker Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and

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Unformatted text preview: will cost \$905,000. Projected net cash inflows are as follows: .......... Year 1 ............. Year 2... Year 3 ..... Year 4... Year 5 .... Year 6 ............ \$262,000 \$255,000 \$224,000 \$210,000 \$204,000 \$173,000 Requirements 1. Compute this project's NPV using Walker Industries' 14% hurdle rate. Should the company invest in the equipment? Why or why not? 2. Walker Industries could refurbish the equipment at the end of six years for \$105,000. The refurbished equipment could be used one more year, providing \$72,000 of net cash inflows in Year 7. In addition, the refurbished equipment would have a \$55,000 residual value at the end of Year 7. Should Walker Industries invest in the equipment and refurbish it after six years? Why or why not? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.)...
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• Spring '14
• BruceHuber

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