# 1. A manager of the engineering department of Manchester University

1. A manager of the engineering department of Manchester University is

contemplating acquiring 120 computers. The computers will cost $240,000

cash, have zero terminal salvage value, and a useful life of 3 years.

Annual cash savings from operations will be $110,000. The required rate

of return is 14%. There are no taxes.

a. Compute the NPV.

b. Should the engineering department acquire the computers? Explain.Present Vales of Cash Inflows

City View Restaurant is about to open at a new location. Operating plans indicate the following expected cash flows:

Outflows Inflows

Initial investment now $235,000 $ ------

End of year: 1 $150,000 $200,000

2 $200,000 $250,000

3 $250,000 $300,000

4 $300,000 $450,000

5 $350,000 $500,000

1. Compute the NPV for all these cash flows. This should be a single amount. Use a discount rate of 14%.

2.

Suppose the minimum desired rate was 12%. Without further calculations,

determine whether the NPV is positive or negative Explain.Weaknesses

and Payback Model

De Luca Company is considering two possible

investments, each of which requires an initial investment of $12,000.

Investment A will provide a cash flow of $3,000 at the end of each year

for 4 years. Investment B will provide a cash flow of $2,000 at the end

of each year for 10 years.

1. Determine the payback period for each investment. Which investment is most desirable using the payback method?

2.

Compute the NPV of each investment using a desired rate of return 5%.

Which investment is most desirable using the NPV method?

3. Explain

why the payback method does not lead to an optimal decision for the De

Luca Company.Comparison of Capital-Budgeting Techniques

The Jackson

City Park department is considering the purchase of a new, more

efficient pool heater for its Moorcroft Swimming Pool at a cost of

$15,000. It should save $3,000 in cash operating costs per year. Its

estimated useful life is 8 years, and it will have zero disposal value.

Ignore taxes.

1. What is the payback time?

2. Compute the NPV if the minimum rate of return desired is 8%. Should the department buy the heater? Why?

3. Using the ARR model, compute the rate of return on the initial investment.

contemplating acquiring 120 computers. The computers will cost $240,000

cash, have zero terminal salvage value, and a useful life of 3 years.

Annual cash savings from operations will be $110,000. The required rate

of return is 14%. There are no taxes.

a. Compute the NPV.

b. Should the engineering department acquire the computers? Explain.Present Vales of Cash Inflows

City View Restaurant is about to open at a new location. Operating plans indicate the following expected cash flows:

Outflows Inflows

Initial investment now $235,000 $ ------

End of year: 1 $150,000 $200,000

2 $200,000 $250,000

3 $250,000 $300,000

4 $300,000 $450,000

5 $350,000 $500,000

1. Compute the NPV for all these cash flows. This should be a single amount. Use a discount rate of 14%.

2.

Suppose the minimum desired rate was 12%. Without further calculations,

determine whether the NPV is positive or negative Explain.Weaknesses

and Payback Model

De Luca Company is considering two possible

investments, each of which requires an initial investment of $12,000.

Investment A will provide a cash flow of $3,000 at the end of each year

for 4 years. Investment B will provide a cash flow of $2,000 at the end

of each year for 10 years.

1. Determine the payback period for each investment. Which investment is most desirable using the payback method?

2.

Compute the NPV of each investment using a desired rate of return 5%.

Which investment is most desirable using the NPV method?

3. Explain

why the payback method does not lead to an optimal decision for the De

Luca Company.Comparison of Capital-Budgeting Techniques

The Jackson

City Park department is considering the purchase of a new, more

efficient pool heater for its Moorcroft Swimming Pool at a cost of

$15,000. It should save $3,000 in cash operating costs per year. Its

estimated useful life is 8 years, and it will have zero disposal value.

Ignore taxes.

1. What is the payback time?

2. Compute the NPV if the minimum rate of return desired is 8%. Should the department buy the heater? Why?

3. Using the ARR model, compute the rate of return on the initial investment.

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