Alternative Project Evaluation Methods: Multiple-Choice:

a. Polar Company is planning to purchase a new machine for $30,000. The payback period is expected to be five years. The new machine is expected to produce cash flow from operations of $7,000 a year in each of the next three years and $5,500 in the fourth year. Book depreciation of $5,000 a year will be charged against revenue for each of the five years of the payback period. What is the amount of cash flow from operations that the new machine is expected to produce in the last (fifth) year of the payback period?

(1) $1,000. (2) $3,500. (3) $5,000. (4) $8,500.

b. The Fudge Company is planning to purchase a new machine, which it will depreciate on a straight-line basis over a 10-year period with no salvage value and a full year's depreciation taken in the year of acquisition. The new machine is expected to produce cash flow from operations of $66,000 a year in each of the next 10 years. The accounting (book value) rate of return on the initial invest- ment is expected to be 12 percent. How much will the new machine cost?

(1) $300,000. (2) $550,000. (3) $660,000. (4) $792,000.

c. Heap Company invested in a two-year project with an internal rate of return of 10 percent. The present value of $1 for one period at 10 percent is .909, and the present value of $1 for two periods at 10 percent is .826. The project is expected to produce cash flow from operations of $40,000 in the first year and $50,000 in the second year. How much will the project cost? (Use these rounded PV factors.)

(1) $74,340. (2) $77,660. (3) $81,810. (4) $90,000.