9/3/22, 9:19 AM (Solved) Payback comparisons Nova Products has a 5-year maximum acceptable payback period.

k period. The firm is considering the purc…

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(SOLVED) PAYBACK COMPARISONS NOVA PRODUCTS HAS A 5-YEAR MAXIMUM ACCEPTABLE PAYBACK PERIOD. THE FIRM IS CONSIDERING THE PURCHASE OF A NEW
MACHINE AND MUST... (HTTPS://TUTORIALSPRIME.NET/200053785)

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Payback comparisons Nova Products has a 5-year maximum acceptable payback
period. The firm is considering the purchase of a new machine and must choose between
two alternative ones. The first machine requires an initial investment of
$14,000 and generates annual after-tax cash inflows of $3,000 for each of the next
7 years. The second machine requires an initial investment of $21,000 and provides
an annual cash inflow after taxes of $4,000 for 20 years.
a) Determine 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. choose between d provides NPV: Mutually exclusive projects Hook Industries is considering the replacement of
one of its old drill presses. Three alternative replacement presses are under consideration.
The relevant cash flows associated with each are shown in the following table.
The firm’s cost of capital is 15%. Initial investment (CF 0)
Year (t)
1
2
3
4
5
6
7
8 Press A
Press B
Press C
$85,000 $60,000 $130,000
Cash inflows (CFt)
$18,000 $12,000 $50,000
$18,000 $14,000 $30,000
$18,000 $16,000 $20,000
$18,000 $18,000 $20,000
$18,000 $20,000 $20,000
$18,000 $25,000 $30,000
$18,000 ------$40,000
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9/3/22, 9:19 AM (Solved) Payback comparisons Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purc…
$18,000 ------$50,000 a. Calculate the net present value (NPV) of each press.
b. Using NPV, evaluate the acceptability of each press.
c. Rank the presses from best to worst using NPV.
d. Calculate the profitability index (PI) for each press.
e. Rank the presses from best to worst using PI. acement of
er consideration. IRR: Mutually exclusive projects Bell Manufacturing is attempting to choose the
better of two mutually exclusive projects for expanding the firm’s warehouse capacity.
The relevant cash flows for the projects are shown in the following table. The
firm’s cost of capital is 15%.
Project X
Project Y
Initial Investment (CF0
$500,000
$325,000
Cash Inflows (CFt)
Year (t)
1
$ 100,000.00 $ 140,000.00
2
$120,00
$ 120,000.00
3
$ 150,000.00 $ 95,000.00
4
$ 190,000.00 $ 70,000.00
5
$ 250,000.00 $ 50,000.00 a. Calculate the IRR to the nearest whole percent for each of the projects.
b. Assess the acceptability of each project on the basis of the IRRs found in part a.
c. Which project, on this basis, is preferred? o choose the
rehouse capacity. und in part a. Payback, NPV, and IRR Rieger International is attempting to evaluate the feasibility
of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated
the cash inflows associated with the proposal as shown in the following table.
The firm has a 12% cost of capital. Year (t)
$
1.00
$
2.00
$
3.00
$
4.00
$
5.00 Cash Inflows (CF0)
$ 20,000.00
$ 25,000.00
$ 30,000.00
$ 35,000.00
$ 40,000.00 a. Calculate the payback period for the proposed investment.
b. Calculate the net present value (NPV) for the proposed investment.
c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent,
for the proposed investment.
d. Evaluate the acceptability of the proposed investment using NPV and IRR. What
recommendation would you make relative to implementation of the project? Why? has estimated Expansion versus replacement cash flows Edison Systems has
estimated the cash
flows over the 5-year lives for two projects, A and B. These cash flows are summarized
in the table below. Initial Investment
Year
$
1.00
$
2.00
$
3.00
$
4.00
$
5.00 Project A
Project B
$40,000
$12,000
Operating Cash Inflows
$ 10,000.00 $ 6,000.00
$ 12,000.00 $ 6,000.00

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9/3/22, 9:19 AM (Solved) Payback comparisons Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purc…
$ 14,000.00 $ 6,000.00
$ 16,000.00 $ 6,000.00
$ 10,000.00 $ 6,000.00 *After- tax cahs inflow expected from liquidation
a. If project A were actually a replacement for project B and the $12,000 initial investment
shown for project B were the after-tax cash inflow expected from liquidating
it, what would be the relevant cash flows for this replacement decision?
b. How can an expansion decision such as project A be viewed as a special form of
a replacement decision? Explain. mmarized al investment Initial investment: Basic calculation Cushing Corporation is considering the purchase
of a new grading machine to replace the existing one. The existing machine was purchased
3 years ago at an installed cost of $20,000; it was being depreciated under
MACRS using a 5-year recovery period. (See Table 4.2 on page 120 for the applicable
depreciation percentages.) The existing machine is expected to have a usable life of at
least 5 more years. The new machine costs $35,000 and requires $5,000 in installation
costs; it will be depreciated using a 5-year recovery period under MACRS. The
existing machine can currently be sold for $25,000 without incurring any removal or
cleanup costs. The firm is subject to a 40% tax rate. Calculate the initial investment
associated with the proposed purchase of a new grading machine. the purchase
ne was purchased he applicable
able life of at
n installation removal or
nvestment Breakeven cash inflows The One Ring Company, a leading producer of fine cast silver
jewelry, is considering the purchase of new casting equipment that will allow it to expand
its product line. The up-front cost of the equipment is $750,000. The company
expects that the equipment will produce steady income throughout its 10-year life.
a. If One Ring requires a 9% return on its investment, what minimum yearly cash
inflow will be necessary for the company to go forward with this project?
b. How would the minimum yearly cash inflow change if the company required a
12% return on its investment? fine cast silver
allow it to expand 0-year life.
early cash equired a Basic scenario analysis Murdock Paints is in the process of evaluating two mutually
exclusive additions to its processing capacity. The firm’s financial analysts have developed
pessimistic, most likely, and optimistic estimates of the annual cash inflows
associated with each project. These estimates are shown in the following table. Initial Investment (CF0)
Outome
Pessimistic
Most Likely
Optimistic Project A Project B
($8,000) ($8,000)
Annual Cash Inflow (CF)
$200
$900
$1,000
$1,000
$1,800
$1,100 a. Determine the range of annual cash inflows for each of the two projects.
b. Assume that the firm’s cost of capital is 10% and that both projects have 20-year
lives. Construct a table similar to this one for the NPVs for each project. Include
the range of NPVs for each project.
c. Do parts a and b provide consistent views of the two projects? Explain.
d. Which project do you recommend? Why? o mutually
ts have developed ve 20-year

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