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its cost of capital at 9%. The cash inflows associated with the two
projects are shown in the following table. Cash inflows (CFt) Year
Project A Project B 1 $45,000 $75,000 2 45,000 60,000 3 45,000
30,000 4 45,000 30,000 5 45,000 30,000 6 45,000 30,000 a. Calculate
the payback period for each project. b. Calculate the NPV of each
project at 0%. c. Calculate the NPV of each project at 9%. d. Derive
the IRR of each project. e. Rank the projects by each of the techniques
used. Make and justify a recommendation. f. Go back one more time
and calculate the NPV of each project using a cost of capital of 12%.
Does the ranking of the two projects change compared to your answer
in part e? Why? P11–1 Classification of expenditures Given the
following list of outlays, indicate whether each is normally considered
a capital expenditure or an operating expenditure. Explain your
answers. LG 2 a. An initial lease payment of $5,000 for electronic
point-of-sale cash register systems b. An outlay of $20,000 to
purchase patent rights from an inventor c. An outlay of $80,000 for a
major research and development program d. An $80,000 investment
in a portfolio of marketable securities e. A $300 outlay for an office
machine f. An outlay of $2,000 for a new machine tool g. An outlay
of $240,000 for a new building h. An outlay of $1,000 for a marketing
research report P11–4 Sunk costs and opportunity costs Masters Golf
Products, Inc., spent 3 years and $1,000,000 to develop its new line of
club heads to replace a line that is becoming obsolete. To begin
manufacturing them, the company will have to invest $1,800,000 in
new equipment. The new clubs are expected to generate an increase in
operating cash inflows of $750,000 per year for the next 10 years. The
company has determined that the existing line could be sold to a
competitor for $250,000. a. How should the $1,000,000 in
development costs be classified? b. How should the $250,000 sale
price for the existing line be classified? c. Depict all the known
relevant cash flows on a time line. P11–7 Book value Find the book
value for each of the assets shown in the accompanying table,
assuming that MACRS depreciation is being used. See Table 4.2 on
page 120 for the applicable depreciation percentages. Asset Installed
cost Recovery period (years) Elapsed time since purchase (years) A $
950,000 5 3 B 40,000 3 1 C 96,000 5 4 D 350,000 5 1 E 1,500,000 7 5
P11–8 Book value and taxes on sale of assets Troy Industries