Problem Set 6: Long-Term Investment Decisions

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timer Asked: Apr 3rd, 2017
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Question Description

Details:

Complete the following problems from Chapters 10-12 in Principles of Managerial Finance:

  1. Capital Budgeting Techniques: P10-2; P10-10; P10-16; P10-22
  2. Capital Budgeting Cash Flows: P11-3; P11-12
  3. Risk Refinements in Capital Budgeting: P12-2; P12-4

Must be in MS Excel with all required formulas

Please show all work for each problem.

Unformatted Attachment Preview

P10–2 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. 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? P11–12 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 orcleanup costs. The firm is subject to a 40% tax rate. Calculate the initial investment associated with the proposed purchase of a new grading machine. P12–2 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? ...
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Tutor Answer

Selenica
School: Rice University

HI there!Attached please find the complete solution for all problems in the following Excel file. As per instructions, all work was done using Excel formulae. Thanks again,Selenica

Machine 1
Year
0
1
2
3
4
5
6
7
NPV

-14000
3000
3000
3000
3000
3000
3000
3000

Machine 2
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

-21000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000
4000

a. Determine the payback period for each machine.
Payback
Cost
Cash inflows
Machine 1
14000 /
3000 =
Machine 2
21000 /
4000 =

Payback
Machine 1
Machine 2

Cost
14000
21000

Payback Period (years)
4.67
5.25

b. Comment on the acceptability of the machines, assuming that they are
independent projects.

Machine 1 is the only machine that meets the payback criteria at 4.67 years, whereas Machine 2 has a payback pe
c. Which machine should the firm accept? Why?
The firm should accept Machine 1, because it is the only option that meets the payback criteria of 5 years.
d. Do the machines in this problem illustrate any of the weaknesses of using
payback? Discuss.

There is a huge problem in using payback period alone. For example, the ...

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