# P10-3 Shell CampingGear, Inc., is considering two mutually exclusive projects. Each requires an..

| February 3, 2015

P10-3 Shell CampingGear, Inc., is considering two mutually exclusive projects. Each requires an initialinvestment of \$100,000. John Shell, president of the company, has set a maximumpayback period of 4 years. The after-tax cash inflows associated with each projectare shown in the following table:
Cash inflows (CFt)
Year Project A Project B
1 \$10,000 \$40,000
2 \$20,000 \$30,000
3 \$30,000 \$20,000
4 \$40,000 \$10,000
5 \$20,000 \$20,000
a. Determine the payback period of each project.b. Because they are mutually exclusive, Shell must choose one. Which should thecompany invest in?c. Explain why one of the projects is a better choice than the other.
P10-6Dane Cosmetics is evaluating a new fragrancemixingmachine. The machine requires an initial investment of \$24,000 and willgenerate after-tax cash inflows of \$5,000 per year for 8 years. For each of the costsof capital listed, (1) calculate the net present value (NPV), (2) indicate whether toaccept or reject the machine, and (3) explain your decision.a. The cost of capital is 10%.b. The cost of capital is 12%.c. The cost of capital is 14%.
P10-7 Using a 14% cost of capital, calculate the net present value for each of the independent projects shown in the following table,and indicate whether each is acceptable.
Project A Project B Project C Project D Project E
Initial Investment (CF0) \$26,000 \$500,000 \$170,000 \$950,000 \$80,000
Year (t) Cash inflows (CFt)
1 \$4,000 \$100,000 \$20,000 \$230,000 \$0
2 \$4,000 \$120,000 \$19,000 \$230,000 \$0
3 \$4,000 \$140,000 \$18,000 \$230,000 \$0
4 \$4,000 \$160,000 \$17,000 \$230,000 \$20,000
5 \$4,000 \$180,000 \$16,000 \$230,000 \$30,000
6 \$4,000 \$200,000 \$15,000 \$230,000 \$0
7 \$4,000 \$14,000 \$230,000 \$50,000
8 \$4,000 \$13,000 \$230,000 \$60,000
9 \$4,000 \$12,000 \$70,000
10 \$4,000 \$11,000

P10-14 For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that the firm could have and still find the IRR acceptable.
Project A Project B Project C Project D
Initial Investment (CF0) \$90,000 \$490,000 \$20,000 \$240,000
Year (t) Cash inflows (CFt)
1 \$20,000 \$150,000 \$7,500 \$120,000
2 \$25,000 \$150,000 \$7,500 \$100,000
3 \$30,000 \$150,000 \$7,500 \$80,000
4 \$35,000 \$150,000 \$7,500 \$60,000
5 \$40,000 – \$7,500 \$0

P10-16 Billy and Mandy Jones have \$25,000 to invest. On average, they do not make any investment that will not return at least7.5% per year. They have been approached with an investment opportunity thatrequires \$25,000 upfront and has a payout of \$6,000 at the end of each of the next5 years. Using the internal rate of return (IRR) method and their requirements,determine whether Billy and Mandy should undertake the investment.
P10-21 Rieger International is attempting to evaluate the feasibility of investing \$95,000 in a piece of equipment that has a 5-year life. The firmhas estimated the cash inflows associated with the proposal as shown in thefollowing table. The firm has a 12% cost of capital.
Cash inflows (CFt)
Year Project A Project B
1 \$45,000 \$75,000
2 \$45,000 \$60,000
3 \$45,000 \$30,000
4 \$45,000 \$30,000
5 \$45,000 \$30,000
6 \$45,000 \$30,000
a. Calculate the payback period for the proposed investment.b. Calculate the net present value (NPV) for the proposed investment.c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent,for the proposed investment.d. Evaluate the acceptability of the proposed investment using NPV and IRR. Whatrecommendation would you make relative to implementation of the project?Why?

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