Question
1.Suppose Palmer Properties is considering investing $3.2 million today (i.e., C 0 =-3,200,000) on a new project that is expected to last for 7 years.The
1.Suppose Palmer Properties is considering investing $3.2 million today (i.e., C0 =-3,200,000) on a new project that is expected to last for 7 years.The project is expected to generate annual cash flows of C1 = -200,000; C2 = 400,000, C3 = 750,000 and then $900,000 for period C4 through C7.If the discount rate is 6% and managements payback period cutoff is 4 years:
(a) What is the payback period for the project?Show your work
(b) What is the net present value of the project ?Show your work
(c) What is the internal rate of return on the project ?Show your work
(d) Under which method(s) above should the company accept the project (applying the acceptance rules)?Explain
2.The company is choosing between machine A and B (they are mutually exclusive and the company can only pick one). The initial cost of machine A is $400,000 and it will last for 7 years before it needs to be replaced. The cost of operating machine A each year is $60,000. The initial cost of Machine B is $250,000 and it will last for 5 years before it needs to be replaced. The cost of operating machine B is $90,000 in cash flow per year. If the required rate of return is 7%,
(a) Calculate the 7 year and 5 year annuity factors at 8% annual interest.
(b) Using the annuity factors, find the PV of Machine A and Machine B including all costs (initial + operating).
(c) Which machine is a better choice for the company after considering thedifferent lives of the projects? (Note: be sure to use the equivalent annual annuity method)
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