1) A company produces two boat models, Flyer and Skimmer. Both products are being considered for major investment projects next year. Relevant data follow:

Flyer Skimmer

New investment $424,000 $380,000

Expected net cash flows:

Year 1 150,000 130,000

Year 2 160,000 130,000

Year 3 170,000 130,000

Required:

Use the payback period to evaluate these two investment projects.

Investment 1 payback period ________________

Investment 2 payback period _______________

Accounting Rate of Return

2) Watson Corporation is considering buying a machine for $25,000. Its estimated useful life is 5 years, with no salvage value. Watson anticipates annual net income after taxes of $1,500 from the new machine. What is the accounting rate of return assuming that Watson uses straight-line depreciation and that income is earned uniformly throughout each year?

ARR ___________________________________

Net Present Value

3) A company is considering two alternative investment opportunities, each of which requires an initial cash outlay of $110,000. The expected net cash flows from the two projects follow:

Project A Project Z

Year 1 $ 30,000 $ 44,000

Year 2 44,000 70,000

Year 3 70,000 30,000

Totals $144,000 $144,000

Based on a comparison of their net present values, and assuming the same discount rate of 12% is required for both projects, which project is the better investment? Use the table values below to compute the net present value of each project's cash flows.

Periods Present value of 1 at 12%

1. 0.8929

2. 0.7972

3. 0.7118

Project A Project Z

NPV _______________ _____________