1. 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:

Cost of the combine harvester $436,668

Working capital investment required at the beginning of the harvester's life $21,098

Annual cash receipts from the harvester $234,114

Annual cash disbursements from the harvester $152,174

Salvage value of harvester in 10 years $34,933

Champ Farm requires a minimum return on investment of: 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 harvester. Indicate whether

Champ should undertake the investment, and why.

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2. Entrepreneurial Investments Limited needs to select the best project from four different options.

The net cash inflows from each investment alternative follow:

Year	A	B	C	D
1	$49,303	0	$9,093	$26,614
2	$40,619	0	$20,859	$26,614
3	$29,045	$45,915	$29,956	$26,614
4	0	$54,565	$38,236	$26,614
5	0	$60,000	$49,236	$5,000

Each project requires an initial cash investment of: $101,858

Entrepreneurial Investments requires a minimum return on investment of: 11%

Required:

1. Calculate the profitability index for each investment. Which investment is the best

alternative according to the profitability index?

2. Calculate the payback period for each investment. Which investment is the best

alternative according to the payback period?

3. In your opinion, which method is the best for selecting the optimal investment:

the profitability index or the payback period? Why?