E26-19 Using payback to make capital investment decisions 5.4 yrs

Robinson Hardware is adding a new product line that will require an investment

of $1,454,000. Managers estimate that this investment will have a 10-year life and

generate net cash inflows of $300,000 the first year, $270,000 the second year,

and $260,000 each year thereafter for eight years. Compute the payback period.

E26-20 Using ARR to make capital investments decisions 16.45%

Refer to the Robinson Hardware information in Exercise E26-19. Assume the

project has no residual value. Compute the ARR for the investment. Round to

two places.

E26-21 Using the time value of money 2. $124,656

Janice wants to take the next five years off work to travel around the world. She

estimates her annual cash needs at $28,000 (if she needs more, she will work odd

jobs). Janice believes she can invest her savings at 8% until she depletes her funds.

1. How much money does Janice need now to fund her travels?

2. After speaking with a number of banks, Janice learns she will only be able to

invest her funds at 4%. How much does she need now to fund her travels?

E26-24 Using NPV and profitability index to make capital investment decisions 1. Project B $16,200 NPV

Use the NPV method to determine whether Kyler Products should invest in the

following projects:

Project A: Costs $260,000 and offers seven annual net cash inflows of $57,000.

Kyler Products requires an annual return of 16% on investments of this nature.

Project B: Costs $375,000 and offers 10 annual net cash inflows of $75,000.

Kyler Products demands an annual return of 14% on investments of this nature.

Requirements

1. What is the NPV of each project? Assume neither project has a residual value.

Round to two decimal places.

2. What is the maximum acceptable price to pay for each project?

3. What is the profitability index of each project? Round to two decimal places.

E26-25 Using IRR to make capital investment decisions Project A 12% ” 14% IRR

Refer to the data regarding Kyler Products in Exercise E26-24. Compute the IRR

of each project and use this information to identify the better investment.

P26-38 Using payback, ARR, NPV, and IRR to make capital investment decisions

This problem continues the Davis Consulting, Inc. situation from Problem P25-34

of Chapter 25. Davis Consulting is considering purchasing two different types of

servers. Server A will generate net cash inflows of $25,000 per year and have a zero

residual value. Server A”s estimated useful life is three years and it costs $40,000.

Server B will generate net cash inflows of $25,000 in year 1, $11,000 in year 2,

and $4,000 in year 3. Server B has a $4,000 residual value and an estimated life of

three years. Server B also costs $40,000. Davis”s required rate of return is 14%.

Requirements

1. Calculate payback, accounting rate of return, net present value, and internal

rate of return for both server investments. Use Microsoft Excel to calculate NPV

and IRR.

2. Assuming capital rationing applies, which server should Davis invest in?