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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.