2. Brett Dunlop is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Brett expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows.

Year of Operation Cash Inflow Cash Outflow

2015 $ 13,000 $ 8,300

2016 19,500 11,200

2017 21,500 13,500

2018 21,500 13,500

In addition to these cash flows, Mr. Dunlop expects to pay $21,100 for the equipment. He also expects to pay $3,500 for a major overhaul and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $1,500 salvage value and a four year useful life. Mr. Dunlop desires to earn a rate of return of 9 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) The (PV of $1 and PVA of $1) are available on the link(http://lectures.mhhe.com/connect/0073526789/Tables/table_1.jpg) and (http://lectures.mhhe.com/connect/0077632370/Table%202.JPG)

Required a. Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.)

b-1. Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return. Below or Above

b-2. Based on your answer in Requirement b-1, should the investment opportunity be accepted or Rejected

3. Drinkwater Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $95,000 and $89,600, respectively. The present value of cash inflows and outflows for the second alternative is $213,000 and $205,100, respectively.

Required a. Calculate the net present value of each investment opportunity.

b. Calculate the present value index for each investment opportunity. (Round your answers to 2 decimal places.)

c. Indicate which investment will produce the higher rate of return. Alternative 1 or Alternative 2

4. Hosier and Wogan (H&W) is a partnership that owns a small company. It is considering two alternative investment opportunities. The first investment opportunity will have a five-year useful life, will cost $13,224.81, and will generate expected cash inflows of $3,400 per year. The second investment is expected to have a useful life of four years, will cost $9,415.78, and will generate expected cash inflows of $3,100 per year. Assume that H&W has the funds available to accept only one of the opportunities. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)The (PV of $1 and PVA of $1) are available on the link(http://lectures.mhhe.com/connect/0073526789/Tables/table_1.jpg) and (http://lectures.mhhe.com/connect/0077632370/Table%202.JPG)

Required a. Calculate the internal rate of return of each investment opportunity in %.

b. Based on the internal rates of return, which opportunity should H&W select? First investment or Second investment