12-5

Answer each independent question, (a) through (e), below.

a. Project A costs $5,500 and will generate annual after-tax net cash inflows of $1,950 for 5 years. What is the payback period for this investment under the assumption that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)

b. Project B costs $5,500 and will generate after-tax cash inflows of $550 in year 1, $1,350 in year 2, $2,600 in year 3, $3,050 in year 4, and $2,600 in year 5. What is the payback period (in years) for this investment assuming that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)

c. Project C costs $5,500 and will generate net cash inflows of $2,700 before taxes for 5 years. The firm uses straight-line depreciation with no salvage value and is subject to a 30% tax rate. What is the payback period under the assumption that all cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)

d. Project D costs $5,500 and will generate sales of $5,100 each year for 5 years. The cash expenditures will be $2,050 per year. The firm uses straight-line depreciation with an estimated salvage value of $600 and has a tax rate of 30%.

(1) What is the accounting (book) rate of return based on the original investment? (Round your answer to 2 decimal places.)

(2) What is the book rate of return based on the average book value? (Round your answer to 2 decimal places.)

Use the built-in NPV function in Excel to calculate the amounts for projects a through d. (Round your answers to the nearest whole dollar amount.)

e1. What is the NPV of project A? Assume that the firm requires a minimum after-tax return of 9% on investment.

e2. What is the NPV of project B? Assume that the firm requires a minimum after-tax return of 9% on investment.

e3. What is the NPV of project C? Assume that the firm requires a minimum after-tax return of 9% on investment.

e4. What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 9% on investment.