Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

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

'''''''''''''''''''''''''''''

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

''''''''''''''''''''''''''''''''''''''''''''

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.

'''''''''''''''''''''''''''''''''''''''''''

Year Investment A Investment B 0 -$100 -$100 1 58 31 2 73 58 3 87 180

Explanation / 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