A firm is considering the following three separate situations.
Situation A. Build either a small office building or a convenience store on a parcel of land located a high-traffic area. Adequate funding is available, and both projects are known to be acceptable. The office building requires an initial investment of $620,000 and is expected to provide operating cash inflows of $40,000 per year for 20 years. The convenience store is expected to cost $500,000 and to provide a growing stream of operating cash inflows over its 20-year life. The initial operating cash inflow is $20,000, and it will increase by 5% each year.
Situation B. Replace a machine with a new one that requires a $60,000 initial investment and will provide operating cash inflows of $10,000 per year for the first 5 years. At the end of year 5, a machine overhaul costing $20,000 will be required.
After it is completed, expected operating cash inflows will be $10,000 in year 6; $7,000 in year 7; $4,000 in year 8; and $1,000 in year 9, at the end of which the machine will be scrapped.
Situation C. Invest in any or all of the four machines whose relevant cash flows ate given in the following table. The firm has $500,000 budgeted to fund these machines, all of which are known to be acceptable. The initial investment for each machine is $250,000.
For each situation, indicate:
a. Whether the projects involved are independent or mutually exclusive.
b. Whether the availability of funds is unlimited or capital rationing exists.
c. Whether accept-reject or ranking decisions are required.
d. Whether each projects cash flows axe conventional ornonconventional.