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Champ Farm Ltd. is considering the purchase of a combine harvester to harvest and sell wheat on one of its many properties. The combine harvester
Champ Farm Ltd. is considering the purchase of a combine harvester to harvest and sell wheat on one of its many properties. The combine harvester is expected to have a 10-year life. Other information pertaining to this potential investment follows: $419,596 Cost of the combine harvester Working capital investment required at the beginning of the harvester's life Annual cash receipts from the harvester Annual cash disbursements from the harvester Salvage value of harvester in 10 years Champ Farm requires a minimum return on investment of: $18,279 $ 201,783 $131,159 $33,568 7% At the end of the harvester's life, the working capital investment would no longer be required. Required: Calculate the net present value of harvesting wheat with the combine harvestor. Indicate whether Champ should undertake the investment, and why. Entrepreneurial Investments Limited needs to select the best project from four different options. The net cash inflows from each investment alternative follow: Year 1 2 3 A $50,426 $39,587 $28,773 $0 $0 B $0 $0 $45,100 $54,116 $60,000 $10,404 $20,353 $29,130 $39,219 $ 48,995 D $25,709 $25,709 $25,709 $25,709 $5,000 4 5 Each project requires an initial cash investment of: $98,188 Entrepreneurial Investments requires a minimum return on investment of: 11% Required: 1. Calculate the profitability index for each investiment. Which investment is the best alternative according to the profitability index? (5 marks) 2. Calculate the payback period for each investment. Which investment is the best alternative according to the payback period? (4 marks) 3. In your opinion, which method is the best for selecting the optimal investment: the profitability index or the payback period? Why? (2 marks)
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