Question

Payback, Accounting Rate of Return, Present Value, Net Present Value, Internal Rate of Return For discount factors use Exhibit 12B.1 and Exhibit 12B.2 All scenarios are independent of all other scenarios. Assume that all cash flows are after-tax cash flows a. Kambry Day is considering investing in one of the following two projects. Either project will require an investment of $20,000. The expected cash flows for the two projects follow. Assume that each project is depreciable. ProjectA 6,000 8,000 10,000 10,000 10,000 Year Project B $6,000 8,000 10,000 3,000 3,000 b. Wilma Golding is retiring and has the option to take her retirement as a lump sum of $450,000 or to receive $30,000 per year for 20 years. Wilmas required rate of return is 6% c. David Booth is interested in investing in some tools and equipment so that he can do independent drywalling. The cost of the tools and equipment is $30,000. He estimates that the return from owning his own equipment will be $9,000 per year. The tools and equipment will last 6 years. d. Patsy Folson is evaluating what appears to be an attractive opportunity. She is currently the owner of a small manufacturing company and has the opportunity to acquire another small companys equipment that would provide production of a part currently purchased externally. She estimates that the savings from internal production will be $75,000 per year. She estimates that the equipment will last 10 years. The owner is asking $400,000 for the equipment. Her companys cost of capital is 8%. Required 1. Conceptual Connection: What is the payback period for each of Kambry Days projects? Round your answers to two decimal places Project A Project B If rapid payback is important, which project should be chosen? Project A 2. Conceptual Connection: Which of Kambrys projects should be chosen based on the ARR? If required, round to the nearest percent. Accounting rate of return (ARR) Project A: ARR Project B: ARR 2.6 years 2.6years 441 x 96 30 X 96 Project A 3. Assuming that Wilma Golding will live for another 20 years, should she take the lump sum or the annuity? Wilma should take the lump sum. V 4. Assuming a required rate of return of 8% for David Booth, calculate the NPV of the investment. If required, round to the nearest dollar. NPV $ 11,606 Should David invest? Yes 5. Calculate the IRR for Patsy Folsons project. Round your answer to the nearest percent. Should Patsy acquire the equipment? Yes

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Year Annual Cashflow Cumulative cashflow Annual Cashflow Cumulative cashflow C) 20000 6000 汝XX) 20000 20000 6000 8000 10000 20000 1 14000 14000 생(XX) 14000 생(XX) 7000 4

Pay back Project A 2 year + Project B 2 year + 6000/10000 2.6 years 6000/10000 2.6 years Annual Rate of return Intial outflow Project A Project B 24000/5 10000/5 20000 20000 24% 10%

Pasty Folson Cashflow 75000 PVF @10% 4,60,842.53 3,76,407.65 84,434.89 PV@ 15% Difference Prorata for 400000 60,842.53 x5 84,434.89 10+ 3.60292622 13.60%!

I hope this clarifies you question. Pls rate and comment in case of any query.

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