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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 .