Question

1. The Short-Line Railroad is considering a $200,000 investment in either of two companies. The cash flows are as follows:

Year	Electric Co.			Water Works
1	$	100,000		$	50,000
2		50,000			50,000
3		50,000			100,000
4 – 10		25,000			25,000

a. Compute the payback period for both companies. (Round your answers to 1 decimal place.)
  

b. Which of the investments is superior from the information provided?
  

	Electric Co.
	Water Works

2. Aerospace Dynamics will invest $198,000 in a project that will produce the following cash flows. The cost of capital is 9 percent. (Note that the fourth year’s cash flow is negative.) Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

  

Year	Cash Flow
1		$	48,000
2			60,000
3			54,000
4			(51,000	)
5			155,000

a. What is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
  

  
b. Should the project be undertaken?
  

	Yes
	No

3. The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm’s cost of capital is 10 percent. It will only invest $86,000 this year. It has determined the internal rate of return for each of the following projects.

Project	Project Size			Internal Rate of Return
A	$	11,500			18	%
B		31,500			19
C		26,500			16
D		11,500			13
E		31,500			14
F		21,500			12
G		16,500			21

a. Pick out the projects that the firm should accept. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
  

	Project E
	Project D
	Project A
	Project B
	Project G
	Project F
	Project C

b. If Projects B and G are mutually exclusive, which projects would you accept in spending the $86,000? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

	Project E
	Project B
	Project A
	Project D
	Project G
	Project F
	Project C

Answer 1

Answer 1-a
Payback period of Electric Co. = 3 years
Payback period of Water Works = 3 years
Answer 1-b
As both the investments have a payback period of 3 years , hence no investment is superior to each other.Both are equal.
Answer 2-a
Calculation of net present value of project
Year	Cash flow	Discount factor @ 9%	Present Value
0	-$198,000.00	1	-$198,000.00
1	$48,000.00	0.917431	$44,036.70
2	$60,000.00	0.84168	$50,500.80
3	$54,000.00	0.772183	$41,697.91
4	-$51,000.00	0.708425	-$36,129.69
5	$155,000.00	0.649931	$100,739.36
Net Present value of project			$2,845.08
Answer 2-b
Yes , the project should be undertaken as it has positive NPV.
Answer 3-a
The firm should select the projects having higher IRR and rank it accordingly.
The firm should select the following projects in the following order in spending the $86000.
Project	Project Size
G	$16,500.00
B	$31,500.00
A	$11,500.00
C	$26,500.00
Total	$86,000.00
The answer is Project G,B,A and C.
Answer 3-b
The firm should select the following projects in the following order if Projects B and G are mutually exclusive.
Project	Project Size
G	$16,500.00
A	$11,500.00
C	$26,500.00
E	$31,500.00
Total	$86,000.00
The answer is Project G,A,C and E.