FIN 486 Expect Success/uophelp.com FIN 486 Expect Success/uophelp.com | Page 23

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
its cost of capital at 9%. The cash inflows associated with the two
projects are shown in the following table.
Cash inflows (CFt)
Year
1
2
3
4
5
6

Project A
$45,000
45,000
45,000
45,000
45,000
45,000

Project B
$75,000
60,000
30,000
30,000
30,000
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