1.The Best Company had to decide between two possible pieces of operating equipment with different cash flows. Provide analysis through the use of NPV to assist the company as to which piece of operating equipment they should choose.

Operating Equipment A:

Cost of Capital: 8%

Time

0

1

2

3

4

Cash Flow

-12,000

1,500

2,500

3,000

8,000

Operating Equipment B:

Cost of Capital: 8%

Time

0

1

2

3

4

Cash Flow

-22,000

5,000

5,000

5,000

-2,000

2.A best company is considering Project A and have asked to calculate the Payback Period and advise whether to accept or reject the project. The cost of capital is 7% and maximum allowable payback is five years. Please see the attached cash flow projections.

Time

0

1

2

2

4

5

Cash Flow

-2,000

300

500

500

500

300

3 Offer of $40,000 today or $6,000 annually for 10 years plus $15,000 lump sum at the end of 10 years. Annual interest rate of 8%. Which would company prefer?