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4 2. Calculating Payback An investment project provides cash inflows of $865 per year for eight years. What is the project payback period if the initial cost is $3,100? What if the initial cost is $4,300? What if it is $7.900? 3. Calculating Payback Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following LO 1 LO 1 two projects available, should it accept either of them? Cash Flow (B) Cash Flow (A) Year -$125,000 -$75,000 29,000 33,000 1 32,000 36,000 35,000 19,000 3 240,000 9,000 4. Calculating AAR You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $10.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,293,000, $1,725,000, $1,548,000, and $1,310,000 over these four years, what is the project's average accounting return (AAR)? LO 2 5. Calculating IRR A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project? LO 3 Year Cash Flow -$157,300 1 74,000 2 87,000 3 46,000 6. Calculating NPV For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? LO 4

4 2. Calculating Payback An investment project provides cash inflows of $865 per year for eight years. What is the project payback period if the initial cost is $3,100? What if the initial cost is $4,300? What if it is $7.900? 3. Calculating Payback Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following LO 1 LO 1 two projects available, should it accept either of them? Cash Flow (B) Cash Flow (A) Year -$125,000 -$75,000 29,000 33,000 1 32,000 36,000 35,000 19,000 3 240,000 9,000 4. Calculating AAR You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $10.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,293,000, $1,725,000, $1,548,000, and $1,310,000 over these four years, what is the project's average accounting return (AAR)? LO 2 5. Calculating IRR A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project? LO 3 Year Cash Flow -$157,300 1 74,000 2 87,000 3 46,000 6. Calculating NPV For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? LO 4

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
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4 2. Calculating Payback An investment project provides cash inflows of $865 per year for eight years. What is the project payback period if the initial cost is $3,100? What if the initial cost is $4,300? What if it is $7.900? 3. Calculating Payback Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following LO 1 LO 1 two projects available, should it accept either of them? Cash Flow (B) Cash Flow (A) Year -$125,000 -$75,000 29,000 33,000 1 32,000 36,000 35,000 19,000 3 240,000 9,000 4. Calculating AAR You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $10.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,293,000, $1,725,000, $1,548,000, and $1,310,000 over these four years, what is the project's average accounting return (AAR)? LO 2 5. Calculating IRR A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project? LO 3 Year Cash Flow -$157,300 1 74,000 2 87,000 3 46,000 6. Calculating NPV For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? LO 4
Transcribed Image Text:4 2. Calculating Payback An investment project provides cash inflows of $865 per year for eight years. What is the project payback period if the initial cost is $3,100? What if the initial cost is $4,300? What if it is $7.900? 3. Calculating Payback Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following LO 1 LO 1 two projects available, should it accept either of them? Cash Flow (B) Cash Flow (A) Year -$125,000 -$75,000 29,000 33,000 1 32,000 36,000 35,000 19,000 3 240,000 9,000 4. Calculating AAR You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $10.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,293,000, $1,725,000, $1,548,000, and $1,310,000 over these four years, what is the project's average accounting return (AAR)? LO 2 5. Calculating IRR A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project? LO 3 Year Cash Flow -$157,300 1 74,000 2 87,000 3 46,000 6. Calculating NPV For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? LO 4
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