1. Radiology Associates is considering an investment which will cost $259,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $58,000. This inflow will increase to $150,000 and then $200,000 for the following two years before ceasing permanently. The firm requires a 14 percent rate of return and has a required discounted payback period of three years. Accept or reject his project? Why?
2. Puppy Inc. has the following mutually exclusive investment opportunities. If the appropriate discount rate was 15% what should you do?
Year Project X Project Y
0 -500 -800
1 100 500
2 475 350
3 50 350
A. Calculates each project's payback period cutoff. Which would you accept if Puppy's payback period cutoff is 2 years?
B. Calculate each project's discounted payback period cutoff. Which would you accept if Puppy's payback period cutoff is 2 years?
C. What is the NPV for each project?