1. A printing press company is considering buying one of two machines, X or Y; the respective costs and benefits of each are listed below:

Annual Pre-tax

Machine Cost Life of Machine Savings for Company

X $100,000 4 years $56,000

Y $125,000 5 years $60,000

a. Calculate the after-tax cash flow for each machine. Assume, for ease of calculation, straight-line depreciation and no salvage value for either machine. The firm's tax rate is 40 percent and its required rate of return is 16 percent.

b. Calculate the NPV of each machine and the PI. Which would you select and why?

2. A networking service company is examining two mutually exclusive projects. The probability distributions of annual cash inflows are presented below:

PROJECT A PROJECT B

Probability Cash Flow Probability Cash Flow

0.25 $7,000 0.20 $5,000

0.25 8,000 0.30 6,000

0.25 9,000 0.30 7,000

0.25 10,000 0.20 8,000

What is the expected value and standard deviation of annual cash flows for each project? Which project's cash flows appears riskier?

3- A laundry business is considering an investment project which will cost $1,000 and last for two years. The possible cash flows and their initial and conditional probabilities are given below:

Year 1 Year 2

Initial Cash Conditional Cash

Probability Flow Probability Flow

0.30 $800 0.50 $900

0.50 $700

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0.40 $500 0.25 $800

0.50 $700

0.25 $600

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0.30 $200 0.60 $200

0.40 $100

If the risk-free rate is 4% and the company's required rate of return is 10%, calculate the expected NPV for the project. What is the probability that Treasury securities would be a better investment?