**Unformatted text preview: **ermine 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.
LG2 LG3 9–3 Choosing between two projects with acceptable payback periods Shell Camping Gear, Inc., is considering two mutually exclusive projects. Each requires an
initial investment of $100,000. John Shell, president of the company, has set a
maximum payback period of 4 years. The after-tax cash inflows associated with
each project are as follows:
Cash inflows (CFt)
Year Project A Project B 1 $10,000 $40,000 2 20,000 30,000 3 30,000 20,000 4 40,000 10,000 5 20,000 20,000 a. Determine the payback period of each project.
b. Because they are mutually exclusive, Shell must choose one. Which should
the company invest in?
c. Explain why one of the projects is a better choice than the other.
LG3 9–4 NPV Calculate the net present value (NPV) for the following 20-year projects.
Comment on the acceptability of each. Assume that the firm has an opportunity
cost of 14%.
a. Initial investment is $10,000; cash inflows are $2,000 per year.
b. Initial investment is $25,000; cash inflows are $3,000 per year.
c. Initial investment is $30,000; cash inflows are $5,000 per year. LG3 9–5 NPV for varying costs of capital Dane Cosmetics is evaluating a new
fragrance-mixing machine. The machine requires an initial investment of
$24,000 and will generate after-tax cash inflows of $5,000 per year for 8
years. For each of the costs of capital listed, (1) calculate the net present value
(NPV), (2) indicate whether to accept or reject the machine, and (3) explain
your decision.
a. The cost of capital is 10%.
b. The cost of capital is 12%.
c. The cost of capital is 14%. 416 PART 3 Long-Term Investment Decisions LG3 9–6 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. Project A
Initial investment (CF0) Project B Project C Project D Project E $26,000 $500,000 $170,000 $950,000 $80,000 $ Year (t) Cash inflows (CFt) 1 $4,000 $100,000 $20,000 $230,000 2 4,000 120,000 19,000 230,000 0 3 4,000 140,000 18,000 230,000 0 4 4,000 160,000 17,000 230,000 20,000 5 4,000 180,000 16,000 230,000 30,000 6 4,000 200,000 15,000 230,000 0 7 4,000 14,000 230,000 50,000 8 4,000 13,000 230,000 9 4,000 12,000 10 4,000 11,000 0 60,000
70,000 LG3 9–7 NPV Simes Innovations, Inc., is negotiating to purchase exclusive rights to
manufacture and market a solar-powered toy car. The car’s inventor has offered
Simes the choice of either a one-time payment of $1,500,000 today or a series of
5 year-end payments of $385,000.
a. If Simes has a cost of capital of 9%, which form of payment should the company choose?
b. What yearly payment would make the two offers identical in value at a cost
of capi...

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