Exercise 1 (NPV): Rapid Parcel Service has been offered an eight-year contract to deliver mail

and small parcels between army installations. To accept the contract, the company would have to
purchase several new delivery trucks at a total cost of $450,000. Other data relating to the
contract follow:

If the contract were accepted, several old, fully depreciated trucks would be sold at a total price
of $30,000. These funds would be used to help purchase the new trucks. For tax purposes, the
company computes depreciation deductions assuming zero salvage value and uses straight-line
depreciation. The trucks would be depreciated over eight years. The company requires a 12%
after-tax return on all equipment purchases.
Required:
Compute the net present value of this investment opportunity. Round all dollar amounts to the
nearest whole dollar. Would you recommend that the contract be accepted?

Exercise 2 (IRR): Jefferson County’s Board of Representatives is considering the purchase of a

site for a new sanitary landfill. The purchase price for the site is $234,000 and preparatory work
will cost $88,080. The landfill would be usable for 10 years. The board hired a consultant, who
estimated that the new landfill would cost the county $48,000 per year less to operate than the
county’s current landfill. The current landfill also will last 10 more years. For a landfill project,
Jefferson County can borrow money from the federal government at a subsidized rate. The
county’s hurdle rate is only 6 percent for this project.
Required:
Calculate the landfill project’s internal rate of return. Should the board approve the project?

Exercise 3 (Discounted Payback Period): The management of Iroquois National Bank is

considering an investment in automatic teller machines. The machines would cost $124,200 and
have a useful life of seven years. The bank’s controller has estimated that the automatic teller
machines will save the bank $27,000 after taxes during each year of their life (including the
depreciation tax shield). The machines will have no salvage value. The bank can alternately
invest the money in T-Bond which yields 10% per annum and pay interest monthly.
Required:
Compute the payback period for the proposed investment.