Capital Budgeting Techniques

May 6th, 2015
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Solutions to Problems Note to instructor: In most problems involving the internal rate of return calculation, a financial calculator has been used LG 2: Payback Period (a) $42,000 ÷ $7,000 = 6 years

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Organizational BehaviorChapter 9Capital Budgeting TechniquesSolutions to ProblemsNote to instructor: In most problems involving the internal rate of return calculation, a financial calculator has been used.P9-1.LG 2: Payback PeriodBasic(a) $42,000 $7,000 = 6 years(b) The company should accept the project, since 6 < 8.P9-2.LG 2: Payback ComparisonsIntermediate(a) Machine 1: $14,000 $3,000 = 4 years, 8 monthsMachine 2: $21,000 $4,000 = 5 years, 3 months(b) Only Machine 1 has a payback faster than 5 years and is acceptable. (c) The firm will accept the first machine because the payback period of 4 years, 8 months is less than the 5-year maximum payback required by Nova Products.(d) Machine 2 has returns which last 20 years while Machine 1 has only seven years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period.222P9-3.Part 3 Long-Term Investment DecisionsLG 2: Choosing Between Two Projects with Acceptable Payback Periods Intermediate(a)YearProject ACashInvestmentInflowsBalanceYear?$100,0000Project BCashInvestmentInflowsBalance0?$100,0001$10,000?90,000140,000?60,000220,000?70,000230,000?30,000330,000?40,000320,000?10,000440,0000410,0000520,000520,000Both project A and project B have payback periods of exactly 4 years. (b) Based on the minimum payback acceptance criteria of 4 years set by John Shell, both pr

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