1. Payback period Jordan Enterprises is considering a capital expenditure that requires an initial investment of $42,000 and returns after-tax cash inflows of $7,000 per year for 10 years. The firm has a maximum acceptable payback period of 8 years.
a. Determine the payback period for this project.
b. Should the company accept the project? Why or why not?
2. NPV Calculate the net present value (NPV) for the following 15-year projects. Comment on the acceptability of each. Assume that the firm has a cost of capital of 9%.
a. Initial investment is $1,000,000; cash inflows are $150,000 per year.
b. Initial investment is $2,500,000; cash inflows are $320,000 per year.
c. Initial investment is $3,000,000; cash inflows are $365,000 per year.
3. Net present value: Independent projects Using a 14% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable.
|
|
Project A
|
Project B
|
Project C
|
Project D
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Project E
|
|
Initial investment (CFO)
|
$26,000
|
$500,000
|
$170,000
|
$950,000
|
$80,000
|
|
Year (t)
|
|
Cash inflows (CFt)
|
|
|
|
1
|
$4,000
|
$100,000
|
$20,000
|
$230,000
|
$ 0
|
|
2
|
4,000
|
120,000
|
19,000
|
230,000
|
0
|
|
3
|
4,000
|
140,000
|
18,000
|
230,000
|
0
|
|
4
|
4,000
|
160,000
|
17,000
|
230,000
|
20,000
|
|
5
|
4,000
|
180,000
|
16,000
|
230,000
|
30,000
|
|
6
|
4,000
|
200,000
|
15,000
|
230,000
|
0
|
|
7
|
4,000
|
|
14,000
|
230,000
|
50,000
|
|
8
|
4,000
|
|
13,000
|
230,000
|
60,000
|
|
9
|
4,000
|
|
12,000
|
|
70,000
|
|
10
|
4,000
|
|
11,000
|
|
|