The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $51,000. The annual cash flows have the following projections. Year Cash Flow
1 $20,000
2 23,000
3 27,000
4 13,000
5 8,000
a. If the cost of capital is 12 percent, what is the net present value of selecting a new machine?
b. What is the internal rate of return?
c. Should the project be accepted?
X-treme Vitamin Company is considering two investments, both of which cost $20,000. The cash flows are as follows:
Year Project A Project B
1 $23,000 $20,000
2 10,000 9,000
3 10,000 15,000
Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a-1. Calculate the payback period for Project A and Project B.
a-2. Which of the two projects should be chosen based on the payback method?
a) Project A
b) Project B
b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent.
b-2. Which of the two projects should be chosen based on the net present value method?
a) Project B
b) Project A
c. Should a firm normally have more confidence in the payback method or the net present value method?
a( Payback method
b) Net present value method