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P10–2 Payback comparisons Nova Products has a 5-year maximum
acceptable payback period. The firm is considering the purchase of a
new machine and must choose between two alternative ones. The first
machine requires an initial investment of $14,000 and generates
annual after-tax cash inflows of $3,000 for each of the next 7 years.
The second machine requires an initial investment of $21,000 and
provides an annual cash inflow after taxes of $4,000 for 20 years. a.
Determine the payback period for each machine. b. Comment on the
acceptability of the machines, assuming that they are independent
projects. c. Which machine should the firm accept? Why? d. Do the
machines in this problem illustrate any of the weaknesses of using
payback? Discuss. P10–7 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. P10–10 NPV: Mutually exclusive projects
Hook Industries is considering the replacement of one of its old drill
presses. Three alternative replacement presses are under
consideration. The relevant cash flows associated with each are
shown in the following table. The firm’s cost of capital is 15%. • a.
Calculate the net present value (NPV) of each press. • b. Using
NPV, evaluate the acceptability of each press. • c. Rank the presses
from best to worst using NPV. • d. Calculate the profitability index
(PI) for each press. • e. Rank the presses from best to worst using PI.
P10–14 Internal rate of return For each of the projects shown in the
following table, calculate the internal rate of return (IRR). Then
indicate, for each project, the maximum cost of capital that the firm
could have and still find the IRR acceptable. Project A Project B
Project C Project D Initial investment (CF0) $90,000 $490,000
$20,000 $240,000 Year (t) Cash inflows (CFt) 1 $20,000 $150,000
$7,500 $120,000 2 25,000 150,000 7,500 100,000 3 30,000 150,000
7,500 80,000 4 35,000 150,000 7,500 60,000 5 40,000 — 7,500 —
P10–21 All techniques, conflicting rankings Nicholson Roofing
Materials, Inc., is considering two mutually exclusive projects, each
with an initial investment of $150,000. The company’s board of
directors has set a maximum 4-year payback requirement and has set