Gomez Corporation is considering two alternative investment proposals with the following data:
	Proposal X	Proposal Y
Investment	$8,50,000	$4,68,000
Useful life	8 years	8 years
Estimated annual net	$1,25,000	$78,000
cash inflows for 8 years
Residual value	$40,000	$ -
Depreciation method	Straight-line	Straight-line
Required rate of return	14%	10%

 

 

1a. How long is the payback period for Proposal X?

1b. What is the accounting rate of return for Proposal Y?

2. You have been awarded a scholarship that will pay you $500 per semester at the end of each of the next 8 semesters that you earn a GPA of 3.5 or better. You are a very serious student and you anticipate receiving the scholarship every semester. Using a discount rate of 3% per semester, which of the following is the correct calculation for determining the present value of the scholarship? PLEASE STATE WHY YOU CHOSE THE ANSWER THAT YOU DID.

A) PV = $500 × 3% × 8

B) PV = $500 × (Annuity PV factor, i = 3%, n = 8)

C) PV = $500 × (Annuity FV factor, i = 6%, n = 4)

D) PV = $1,000 × (PV factor, i = 3%, n = 4)

3. Maersk Metal Stamping is analyzing a special investment project. The project will require the purchase of two machines for $30,000 and $8,000 (both machines are required). The total residual value at the end of the project is $1,500. The project will generate cash inflows of $11,000 per year over its 8-year life.

 

If Maersk requires a 6% return, what is the net present value (NPV) of this project? (Use present value tables or Excel.)

 

4. Hincapie Manufacturing is evaluating investing in a new metal stamping machine costing $30,924. Hincapie estimates that it will realize $12,000 in annual cash inflows for each year of the machine's 3-year useful life. Approximately, what is the the internal rate of return (IRR) for the machine? (Use present value tables or Excel.)