1. A firm is considering the following two investment projects. Project A requires an initial

investment of $4,500 and will return $1,200 per year for the next five years. Project B requires an

initial investment of $5,000 and will return $1,300 per year for the next six years. The required

rate of return is 10%.

a. Using NPV method, which project should you choose from a financial manager's point

of view?

b. Using Payback Period method with four-year cutoff, which project should you choose

from a financial manager's point of view?

c. Using Discounted Payback Period method with four-year cutoff, which project should

you choose from a financial manager's point of view?

d. Using Internal Rate of Return method, which project should you choose from a financial

manager's point of view?

2. You are considering a proposal from a new supplier. The supplier claims if you replace your

current equipment with theirs, you could save $20,000 a year. The new equipment will last three

years only, but current equipment will last six more years. The price of the new equipment is

$35,000 today, and the supplier will charge you $38,000 three years later for the same equipment.

Salvage value for the equipment is zero. Finally, assume 30% tax rate.

a. Using straight line depreciation, prepare pro forma statements for the next six years.

b. If the appropriate required rate of return is 12% should you accept the offer or not? Why

or why not?