B1. You are investing in a new business known informally as Zombiebook. The initial investment is $5 million. Future cash flows are projected to be $2 million at the end of years one, two, three, and four. A different business in which you are considering investing is called Angry Rabbits. It too would cost $5 million. Future cash flows for Angry Rabbits are projected to be $1 million at the end of years one, two, and three, followed by a positive cash flow of $20 million at the end of year 4.

a.Compute the payback period for Zombiebook and for Angry Rabbits.

b.On the basis of the two payback computations, which of the two companies would you choose?

3. Does this choice cause you any concern?

(20 pts each)

B2. Dave Hirsh publishes his own manuscripts and is unsure which of two new printers he should purchase. He is a novelist living in Parkman, Illinois. Having slept through most of his Finance 300 course in college, he is unfamiliar with cash flow analysis. He enlists the help of the finance professor at the local university, Dr. Gwen French, to assist him. Together they estimate the following expected initial investment (a negative cash flow) and net positive cash flows for years 1 through 3 for each machine. Dave only needs one printer and estimates it will be worthless after three years of heavy use. Daves required rate of return for this project is 8 percent.

Expected Net Cash Flow

Printer 1 Printer 2

Initial Investment $ (2,000 ) $(2,500)

Year

1 900 1,500

2 1,100 1,300

3 1,300 800

1. Calculate the payback period for each printer.

2. Calculate the net present value for each printer.

3. Calculate the internal rate of return for each printer.

d. Which printer do you think Dr. French will recommend? Why?