Reference no: EM131473192
1. Suppose Palmer Properties is considering investing $3.2 million today (i.e., C0 = -3,200,000) on a new project that is expected to last for 7 years. The project is expected to generate annual cash flows of C1 = -200,000; C2 = 400,000, C3 = 750,000 and then $900,000 for period C4 through C7. If the discount rate is 6% and management's payback period cutoff is 4 years:
(a) What is the payback period for the project? Show your work
(b) What is the net present value of the project ? Show your work
(c) What is the internal rate of return on the project ? Show your work
(d) Under which method(s) above should the company accept the project (applying the acceptance rules)? Explain.
2. The company is choosing between machine A and B (they are mutually exclusive and the company can only pick one). The initial cost of machine A is $400,000 and it will last for 7 years before it needs to be replaced. The cost of operating machine A each year is $60,000. The initial cost of Machine B is $250,000 and it will last for 5 years before it needs to be replaced. The cost of operating machine B is $90,000 in cash flow per year. If the required rate of return is 7%,
(a) Calculate the 7 year and 5 year annuity factors at 8% annual interest.
(b) Using the annuity factors, find the PV of Machine A and Machine B including all costs (initial + operating).
(c) Which machine is a better choice for the company after considering the different lives of the projects? (Note: be sure to use the equivalent annual annuity method)