Broadway Paper Towels, Inc., is considering the purchase of a new machine at a cost of

$$11,070.$ The machine is forecasted to provide $$2,000$ per year in cash flow for eight

years. The company$$s cost of capital $($WACC$)$ is $12\%.$ Using the Internal Rate of

Return Method, evaluate this investment and state whether or not the investment should

be undertaken and why.

Assume a firm has earnings before depreciation and taxes of $$200,000$ and no depreciation. It is in a $40$ percent tax bracket.

a$.$ Compute its cash flow.

b$.$ Assume it has $$200,000$ in depreciation. Recompute its cash flow.

c$.$ How large a cash flow benefit did the depreciation provide?

The Short$-$Line Railroad is considering a $$100,000$ investment in either of the two companies. The cash flows are as follows:

Year Electric Co$.$ Water Works.

$1...................$ $$70,000$ $$15,000$

$2...................15,00015,000$

$3...................15,00060,000$

$4-10.............10,00070,000$

a$.$ Using the payback method, what will the decision be$?$

b$.$ Explain why the answer in part a can be misleading.

The Ogden Corporation makes an investment of $$25,000,$ which yields the following

cash flows:

Year Cash Flow

$1.................$ $ $5,000$

$2.................5,000$

$3.................8,000$

$4.................9,000$

$5.................10,000$

What is the present value with a $9$ percent discount rate $($cost of capital$)?$

Oliver Stone and Rock Company uses a process of capital rationing in its decision making. The firm$$s cost of capital is $12$ percent. It will invest only $$80,000$ this year. It has determined the internal rate of return for each of the following projects.

Project Project Size Percent of Internal Rate of Return

A $..........................$ $$15,00014\%$

B $..........................25,00019$

C $..........................30,00010$

D $..........................25,00016\mathrm{.}5$

E $..........................20,00021$

F $..........................15,00011$

G $..........................25,00018$

H $..........................10,00017\mathrm{.}5$

a$.$ Pick out the projects that the firm should accept.

b$.$ If Projects B and G are mutually exclusive, how would that affect your overall

answer? That is$,$ which projects would you accept in spending the $$80,000?$