E26-19 Using payback to make capital investments decisions – 5.3 yrs.

Rapp Hardware is adding a new product line that will require an investment of $1,418,000. Managers estimate that this investment will have a 10-year life and generate net cash inflow of $310,000 the first year, $290,000 the second year, and $250,000 each year thereafter for eight years. Compute the payback period. Round to one decimal place.

Note: Exercise S26-19 must be completed before attempting Exercise S26-20.

E26-20 Using ARR to make capital investment decisions – 16.67%

Refer to the Rapp hardware information in Exercise E26-19. Assume the project has no residual value. Compute the ARR for the investment. Round to two places.

E26-21 Using the time value of money – 2. $143,208

Sharon wants to take the next five years off work to travel around the world. She estimates her annual cash needs at $34,000 (if she needs more, she will work odd jobs). Sharon believes she can invest her savings at 8% until she depletes her funds.

Requirements

1. How much money does Sharon need now to fund her travels?

2. After speaking with a number of banks, Sharon learns she will only be able to invest her funds at 6%. How much does she need now to fund her travels?

E26-24 Using NPV and profitability index to make capital investment decisions – 1. Project B $500 NPV

Use the NPV method to determine whether Juda Products should invest in the following projects:

Project A: Costs $290,000 and offers seven annual net cash inflows of $57,000. Juda Products requires an annual return of 14% on investments of this nature.

Project B: Costs $395,000 and offers 10 annual net cash inflows of $70,000. Juda Products demands an annual return of 12% on investments of this nature.

Requirements

1. What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places.

2. What is the maximum acceptable price to pay for each project?

3. What is the profitability index of each project? Round to two decimal places.

E26-25 Using IRR to make capital investment decisions – Project A 8%-9%

Refer to the data regarding Juda Products in Exercise E26-24. Compute the IRR of each project, and use this information to identify the better investment.

P26-38 Using payback, ARR, NPV, and IRR to make capital investment decisions

This problem continues the Daniels Consulting situation from Problem P25-33 of Chapter 25. Daniels Consulting is considering purchasing two different types of servers. Server A will generate net cash inflows of $26,000 per year and have a zero residual value. Server A’s estimated useful life is three years, and it costs $44,000.

Server B will generate net cash inflows of $28,000 in year 1, $11,000 in year 2, and $5,000 in year 3. Server B has a $5,000 residual value and an estimated life of three years. Server B also costs $44,000. Daniels’s required rate of return is 14%.

Requirements

1. Calculate payback, accounting rate of return, net present value, and internal rate of return for both server investments. Use Microsoft Excel to calculate NPV and IRR.

2. Assuming capital rationing applies, which server should Daniels invest in?