1. Use the NPV method to determine whether Kyler Products should invest in the following projects: ? Project A: Costs $260,000 and offers seven annual net cash inflows of $57,000. Kyler Products requires an annual return of 16% on projects like A. ? Project B: Costs $375,000 and offers 10 annual net cash inflows of $75,000. Kyler Products demands an annual return of 14% on investments of this nature. Requirements A. What is the NPV of each project? B. What is the maximum acceptable price to pay for each project? C. What is the profitability index of each project?

2. Brighton Manufacturing is considering three capital investment proposals. At this time, the company has funds available to pursue only one of the three investments. A B C

PV of net cash inflows:1735915 1969888 2207765

Initial Investment : (1563887) (1669397) (1886979)

NPV: 172,028 300,491 320,786

A. What investments should Brighton Pursue at this time, why?

3. Leches operates a chain of sandwich shops. The company is considering two possible expansion plans. Plan A would open eight smaller shops at a cost of $8,400,000. Expected annual net cash inflows are $1,500,000, with zero residual value at the end of 10 years. Under Plan B Leches would open three larger shops at a cost of $8,250,000. This plan is expected to generate net cash inflows of $1,080,000 per year for 10 years, the estimated useful life of the properties. Estimated residual value for Plan B is $1,000,000. Leches uses straight line depreciation and requires an annual return of 10%

Requirements

1. Compute the payback period, the ROR, the NPV, and the profitability index of these two plans. What are the strengths and weaknesses of these capital budgeting models? Which expansion plan should leeches chose?Why? Estimate plan A's IRR. How does the IRR compare with the companys required rate of return?