Q 2 Consider the following cash flows for the two investments. What are the payb
ID: 2815092 • Letter: Q
Question
Q 2
Consider the following cash flows for the two investments. What are the payback periods on the two investments?
Question options:
Project A 1.58 years; Project B 2.53 years
Project A 1.46 years; Project B 2.21 years
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Q 3
You are in the lucky situation of having several customers that want to place large orders with your firm. Unfortunately you do not have the capacity to accept all of them and each order will require the purchase of a new machine. Your boss wants to know what rate of return you would get from each of the orders so that she can decide which one to accept and which ones to pass on to your competitors. Realizing the problems with IRR, you decide to use MIRR instead. Suppose you are going to select two of these three orders. Which projects should you recommend if the company’s required return is 16%?
Question options:
1- Order 1 and Order 2
2- Order 1 and Order 3
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Q 4
DeeDee Industries must choose between a gas-powered and an electric-powered forklift for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. The electric-powered forklift will cost $22,000, whereas the gas-powered forklift will cost $17,600. The cost of capital that applies to both investments is 10%. The life for both types of forklift is estimated to be 6 years, during which time the net cash inflows for the electric-powered forklift will be $6,600 per year and those for the gas-powered forklift will be $5,300 per year. Annual net cash inflows include depreciation expenses. Calculate the NPV for each forklift, and decide which to recommend for purchase.
Question options:
1- Purchase electric with an NPV of $6,744.72 which is greater than gas with an NPV of $5,482.88.
2- Purchase electric with an NPV of $5,344.93 which is greater than gas with an NPV of $5,844.59.
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Year Investment A Investment B 0 -$100 -$100 1 58 31 2 73 58 3 87 180Explanation / Answer
1-
Year
Investment A
cumulative cash flow
Investment B
cumulative cash flow
0
($100)
($100)
1
58
58
31
31
2
73
42
amount to be recovered in Year 2
58
89
3
87
180
11
amount to be recovered in Year 2
payback period = year before final recovery+(amount to be recovered/cash flow of final year of recovery)
1+(42/73)
1.58
payback period = year before final recovery+(amount to be recovered/cash flow of final year of recovery)
2+(11/180)
2.06
2-
Year
Order 1
Order 2
Order 3
0
($30,000)
($50,000)
($43,000)
1
15,000
70,000
34,000
2
27,000
-19,000
28,000
MIRR = Using MIRR function in MS excel
19.58%
MIRR = Using MIRR function in MS excel
7.57%
MIRR = Using MIRR function in MS excel
22.04%
order 1& 3 should be accepted as MIRR is greater than required return of 16%
3-
Year
cash flow
present value of cash flow = cash flow/(1+r)6n r= 10%
Year
cash flow
present value of cash flow = cash flow/(1+r)6n r= 10%
0
-22000
-22000
0
-17600
-17600
1
6600
6000
1
5300
4818.182
2
6600
5454.545
2
5300
4380.165
3
6600
4958.678
3
5300
3981.968
4
6600
4507.889
4
5300
3619.971
5
6600
4098.081
5
5300
3290.883
6
6600
3725.528
6
5300
2991.712
NPV
sum of present value of cash inflow
6744.721
NPV
sum of present value of cash inflow
5482.882
1-
Year
Investment A
cumulative cash flow
Investment B
cumulative cash flow
0
($100)
($100)
1
58
58
31
31
2
73
42
amount to be recovered in Year 2
58
89
3
87
180
11
amount to be recovered in Year 2
payback period = year before final recovery+(amount to be recovered/cash flow of final year of recovery)
1+(42/73)
1.58
payback period = year before final recovery+(amount to be recovered/cash flow of final year of recovery)
2+(11/180)
2.06
2-
Year
Order 1
Order 2
Order 3
0
($30,000)
($50,000)
($43,000)
1
15,000
70,000
34,000
2
27,000
-19,000
28,000
MIRR = Using MIRR function in MS excel
19.58%
MIRR = Using MIRR function in MS excel
7.57%
MIRR = Using MIRR function in MS excel
22.04%
order 1& 3 should be accepted as MIRR is greater than required return of 16%
3-
Year
cash flow
present value of cash flow = cash flow/(1+r)6n r= 10%
Year
cash flow
present value of cash flow = cash flow/(1+r)6n r= 10%
0
-22000
-22000
0
-17600
-17600
1
6600
6000
1
5300
4818.182
2
6600
5454.545
2
5300
4380.165
3
6600
4958.678
3
5300
3981.968
4
6600
4507.889
4
5300
3619.971
5
6600
4098.081
5
5300
3290.883
6
6600
3725.528
6
5300
2991.712
NPV
sum of present value of cash inflow
6744.721
NPV
sum of present value of cash inflow
5482.882
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