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
c. Which machine should the firm accept? Why?
d. Do the machines in this problem illustrate any of the weaknesses of using
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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