INANCE MGT102

CASE #2

DUE DECEMBER 10th

1.

The Best Company had to decide between two possible pieces of operating equipment

with different cash flows. Provide analysis through the use of NPV to assist the company

as to which piece of operating equipment they should choose. (10 marks)

Operating Equipment A:

Cost of Capital: 8%

Time

0

1

2

3

4

Cash Flow

-12,000

1,500

2,500

3,000

8,000

Operating Equipment B:

Cost of Capital: 8%

Time

0

1

2

3

4

Cash

Flow

-22,000

5,000

5,000

5,000

-2,000

2.

A company is considering Project A and have asked you to calculate the Payback Period

and advise whether to accept or reject the project. The cost of capital is 7% and

maximum allowable payback is five years. Please see the attached cash flow projections.

(5 marks)

Time

0

1

2

2

4

5

Cash Flow

-2,000

300

500

500

500

300

3.

Offer of $40,000 today

or

$6,000 annually for 10 years plus $15,000 lump sum at the end of 10

years. Annual interest rate of 8%. Which would you prefer? (5 mark