CHAPTER 9 CASE

CHAPTER 9 CASE - CHAPTER 9 CASE Cost of PV N Capital Making...

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NPV Cost of Capital CHAPTER 9 CASE Making Norwich Tool's Lathe Investment Decision The student is faced with a typical capital budgeting situation in Chapter 9's case. Norwich Tool must select one of two lathes that have different initial investments and cash inflow patterns. After calculating both unsophisticated and sophisticated capital budgeting techniques, the student must reevaluate the decision by taking into account the higher risk of one lathe. a. Payback period Lathe A: Years 1 - 4 = $644,000 Payback = 4 years + ($16,000 ÷ $450,000) = 4.04 years Lathe B: Years 1 - 3 = $304,000 Payback = 3 years + ($56,000 ÷ $86,000) = 3.65 years Lathe A will be rejected since the payback is longer than the 4-year maximum accepted, and lathe B is accepted because the project payback period is less than the 4-year payback cutoff. b. (1) NPV Lathe A Lathe B Year Cash Flow PVIF 13% PV Cash Flow PVIF 13%,t PV\ 1 $128,000 .885 $113,280 $ 88,000 .885 $ 77,880 2 182,000 .783 142,506 120,000 .783 93,960
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This note was uploaded on 01/27/2011 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

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CHAPTER 9 CASE - CHAPTER 9 CASE Cost of PV N Capital Making...

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