5.) Diaz Camera Company is considering two investments, both of which cost $12,000. The cash flows are as follows:

Use Appendix B.

Year Project A Project B

1 $5,000 $4,000

2 5,000 4,000

3 6,000 11,000

________________________________________

(a-1) Calculate the payback period for project A and project B. (Round your answers to 2 decimal places.)

Payback period

Project A _____years

Project B ______years

________________________________________

(a-2) Which of the two projects should be chosen based on the payback method?

Project A

Project B

(b-1) Calculate the net present value for project A and project B. Assume a cost of capital of 8 percent. (Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Net present value

Project A $ _______

Project B $ _______

________________________________________

(b-2) Which of the two projects should be chosen based on the net present value method?

Project B

Project A

(c) Should a firm normally have more confidence in answer derived based on Net present value method or Payback method?

Payback method

Net present value method

6.) Kings Department Store is contemplating the purchase of a new machine at a cost of $32,065. The machine will provide $5,400 per year in cash flow for 11 years. Kings has a cost of capital of 9 percent. Use Appendix D.

(a) What is the internal rate of return? (Round "PV Factor" to 3 decimal places. Round your answer to the nearest whole percent. Omit the "%" sign in your response.)

Internal rate of return _______%

(b) Should the project be undertaken?

No

Yes

7.) Wildcat Oil Company was set up to take large risks and is willing to take the greatest risk possible. Richmond Construction Company is more typical of the average corporation and is risk-averse.

Projects Returns: Standard

Expected value deviation

A $ 268,000 $ 225,000

B 756,000 464,000

C 169,000 135,000

D 162,000 277,000

________________________________________

(a-1) Compute the coefficients of variation. (Round your answers to 3 decimal places.)

Coefficient of variation

Project A ______

Project B ______

Project C ______

Project D ______

________________________________________

(a-2) Which of the following four projects should Wildcat Oil Company choose?

Project A

Project B

Project C

Project D

(b) Which one of the four projects should Richmond Construction Company choose based on the same criteria of using the coefficient of variation?

Project B

Project C

Project D

Project A