1-

Cash payback period for a Service Company

Omni Financial Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $200,000 and each with an 8-year life and expected total net cash flows of $320,000. Location 1 is expected to provide equal annual net cash flows of $40,000, and Location 2 is expected to have the following unequal annual net cash flows:

Year 1	$78,000		Year 5	$42,000
Year 2	58,000		Year 6	34,000
Year 3	38,000		Year 7	24,000
Year 4	26,000		Year 8	20,000

Determine the cash payback period for both location proposals.

Location 1	12345678 years
Location 2	12345678 years

2-

Net Present Value Method

The following data are accumulated by Lingle Company in evaluating the purchase of $108,700 of equipment, having a 4-year useful life:

	Net Income		Net Cash Flow
Year 1	$41,000		$70,000
Year 2	25,000		54,000
Year 3	12,000		41,000
Year 4	(1,000)		27,000

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

a. Assuming that the desired rate of return is 20%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

Present value of net cash flow	$fill in the blank 1
Amount to be invested	$fill in the blank 2
Net present value	$fill in the blank 3

3-

Net Present ValueUnequal Lives

Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $577,728. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$197,000		$246,000
2	175,000		229,000
3	175,000		211,000
4	140,000		217,000
5	106,000
6	89,000
7	77,000
8	77,000

The estimated residual value of the processing mill at the end of Year 4 is $250,000.

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. Use the present value table appearing above.

	Processing Mill	Electric Shovel
Present value of net cash flow total	$fill in the blank 1	$fill in the blank 2
Less amount to be invested	$fill in the blank 3	$fill in the blank 4
Net present value	$fill in the blank 5	$fill in the blank 6

Which project should be favored?

Electric ShovelProcessing MillNeither because they are equal