10-5

• The Bear Co. is considering building a new factory to produce aluminum baseball bats.
• This project would require an initial cash outlay of $5 million and would generate annual cash inflows of $1 million per year for 8 years.
• Calculate the projects Discounted Payback Period given the following:

1. Required rate of return of 7%.
2. Required rate of return of 9%.
3. Required rate of return of 11%.
4. Required rate of return of 13%.
5. What can you observe from your calculations above? How does the Discounted Payback Period react to the changes in the discount rate?

10-6

• The Wolf Co. is considering purchasing new machinery for its business line.
• This investment requires initial cash outlay of $150,000 and would generate cash inflow of $20,000 per year for 15 years.

1. If the required rate of return is 5%, calculate the projects Discounted Payback Period.
2. If the required rate of return is 10%, calculate the projects Discounted Payback Period.
3. Would the project be accepted under part (a) or (b)? Explain.

10-7

• The Rabbit Co. is considering two projects: A and B.
• Both projects are subject to a 5-year loan from the bank, and a 15% annual interest rate.

	Project A	Project B
Initial outlay, Year 0	-$50,000	-$25,000
Inflow, Year 1	$20,000	$7,000
Inflow, Year 2	$20,000	$7,000
Inflow, Year 3	$10,000	$7,000
Inflow, Year 4	$10,000	$7,000
Inflow, Year 5	$30,000	$7,000
Inflow, Year 6	$30,000	$7,000

1. Calculate the Payback Period for each project.

• Project A:
• Project B:

2. Which project(s) should be accepted, if the two projects are independent? Explain.
3. Which project(s) should be accepted, if the two projects are mutually exclusive? Explain.

10-8

• The Giraffe Co. is considering two projects: A and B.
• Both projects are subject to a 5-year loan from the bank, and a 15% annual interest rate.

	Project A	Project B
Initial outlay, Year 0	-$50,000	-$25,000
Inflow, Year 1	$20,000	$7,000
Inflow, Year 2	$20,000	$7,000
Inflow, Year 3	$10,000	$7,000
Inflow, Year 4	$10,000	$7,000
Inflow, Year 5	$30,000	$7,000
Inflow, Year 6	$30,000	$7,000

1. Calculate the Discounted Payback Period for each project.

• Project A:
• Project B:

2. Which project(s) should be accepted, if the two projects are independent? Explain.
3. Which project(s) should be accepted, if the two projects are mutually exclusive? Explain.

10-9

• The Emu Co. is considering buying new equipment needed to expand its business line.
• This investment would require an initial cash outlay of $170,000.

1. Calculate the projects Payback Period, if this investment could generate an annual cash inflow of $20,000 per year for 10 years in a row.
2. Calculate the projects Payback Period, if this investment could generate an annual cash inflow of $25,000 per year for 10 years in a row.
3. Calculate the projects Payback Period, if this investment could generate an annual cash inflow of $30,000 per year for 10 years in a row.
4. Would the project be accepted under part (a), (b), or (c)? Explain.
5. Would you answer to part (d) above change, if the project funding was subject to a 7-year loan from the bank? If yes, how? If not, why not? Explain.

10-10

• The Crocodile Co. is considering buying new equipment needed to expand its production line.
• This investment would generate an annual cash inflow of $2,000 per year for 8 years in a row.

1. Calculate the Payback Period, if this investment required an initial cash outlay of $9,000.
2. Calculate the Payback Period, if this investment required an initial cash outlay of $11,000.
3. Calculate the Payback Period, if this investment required an initial cash outlay of $13,000.
4. Would the project be accepted under part (a), (b), or (c)? Explain.
5. Would you answer to part (d) above change, if the project funding was subject to a 6-year loan from the bank? If yes, how? If not, why not? Explain.