1) Let the investment which costs $100,000 and has the cash inflow of $25,000 every year for five years. The needed return is 9%, and payback is four years.
i) Determine the payback period?
ii) Determine the discounted payback period?
iii) Find out the NPV?
iv) Compute the IRR?
v) Should we accept project?
vi) What decision rule must be the main decision method?
2) Norman, Inc., is considering 2 mutually exclusive projects. Project X is a 5-year project with the initial investment of $1.4 million and expected cash flow of $450,000, $605,000, $811,000, $900,000 and $951,000 over the next 5 years. Project Y is a 4-year project with the initial investment of $1.6 million and expected cash flow of $771,000, $865,000, $913,000, and $969,000 over next 4 years. Supposing the cost of capital is 15%.
i) Compute the EAC for both projects.
ii) Which project must the firm select? Describe in detail.