1. Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $124,869. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $79,400, and annual cash outflows would increase by $40,500. Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.52.)

Cash payback period

enter the Cash payback period in years rounded to 2 decimal places years.

2. Drake Corporation is reviewing an investment proposal. The initial cost is $103,400. Estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is assumed to equal its book value. There would be no salvage value at the end of the investments life.

Investment Proposal
Year		Book Value			Annual Cash Flows			Annual Net Income
1		$69,900			$44,700			$11,200
2		41,600			40,700			12,400
3		20,900			36,000			15,300
4		7,800			29,100			16,000
5		0			25,280			17,480

Drake Corporation uses an 11% target rate of return for new investment proposals. Click here to view the factor table. (a) What is the cash payback period for this proposal? (Round answer to 2 decimal places, e.g. 10.50.)

Cash payback period

enter the Cash payback period in years rounded to 2 decimal places years

(b) What is the annual rate of return for the investment? (Round answer to 2 decimal places, e.g. 10.50%.)

Annual rate of return for the investment

enter the Annual rate of return for the investment in percentages rounded to 2 decimal places

%

(c) What is the net present value of the investment? (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses eg (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Net present value

$enter the net present value in dollars rounded to 0 decimal places

3.

Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The companys cost of capital is 6%.

		Option A		Option B
Initial cost		$186,000		$277,000
Annual cash inflows		$72,200		$82,700
Annual cash outflows		$28,000		$26,800
Cost to rebuild (end of year 4)		$51,000		$0
Salvage value		$0		$8,600
Estimated useful life		7 years		7 years

Click here to view the factor table.

Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to 0 decimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

		Net Present Value		Profitability Index		Internal Rate of Return
Option A		$enter a dollar amount rounded to 0 decimal places		enter the profitability index rounded to 2 decimal places		enter percentages rounded to 0 decimal places %
Option B		$enter a dollar amount rounded to 0 decimal places		enter the profitability index rounded to 2 decimal places		enter percentages rounded to 0 decimal places %

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Which option should be accepted?

select an option Option BOption A should be accepted.