k Payback comparisons Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternative ones. The first machine requires an initial investment of $14,000 and generates annual after-tax cash inflows of $3,000 for each of the next 7 years. The second machine requires an initial investment of $21,000 and provides an annual cash inflow after taxes of $4,000 for 20 years. a. Determine the payback period for each machine. b. Comment on the acceptability of the machines, assuming that they are inde- pendent projects. c. Which machine should the firm accept? Why? d. Do the machines in this problem illustrate any of the weaknesses of using pay- back? Discuss. Net present value-Independent projects Using a 14% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable. Project A Project B Project D Project E Project C $170,000 $950,000 $80,000 Initial investment (CF) $26,000 $500,000 Year (+) $ 0 0 1 2 3 Cash inflows (CF) $100,000 $20,000 $230,000 120,000 19,000 230,000 140,000 18,000 230,000 160,000 17,000 230,000 180,000 16,000 230,000 200,000 15,000 230,000 14.000 230.000 $4,000 4,000 4,000 4,000 4,000 4,000 4.000 4 5 6 7 20,000 30,000 0 50.000 notes 12 All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is consid- ering two mutually exclusive projects, each with an initial investment of $150,000. The company's board of directors has set a maximum 4-year payback requirement and has set its cost of capital at 9%. The cash inflows associated with the two projects are shown in the following table. Year 1 2 3 4 5 6 Cash inflows (CF) Project A Project B $45,000 $75,000 45,000 60,000 45,000 30,000 45,000 30,000 45,000 30,000 45,000 30,000 a. Calculate the payback period for each project. b. Calculate the NPV of each project at 0%. c. Calculate the NPV of each project at 9%. d. Derive the IRR of each project. e. Rank the projects by each of the techniques used. Make and justify a recommen- dation. Review View Tell me Calibri (Body) 11 A Texw General Merges Center Conditional Form Cell Formatting Table Studies If both projects are independent then it depends on management numbers of payback years. For example in case of Machine 1, if the management has decide [ F H M Q K N Determine the payback period for each machine Solt Paback Period Initial investments intows Machine 1 4 yrs 2000/3000 467 Machine 2 TS Machine 2 Investment Balance 21000 021,000) 4000 (17.000) 4000 (13,000 4000 19,000) 4000 (5,000) 4000 (1,000) 4000 3,000 4000 4000 4000 4000 4000 4000 4000 4000 4000 1000/4000 5.25 yes b) Comment on the acceptability of the machines, assuming that they are independent projects of both projects are independent then it depends on mapement numbers of payback years for sale in case of Machine if the management has decided 5 number of years then Machine 1 proposal will be accepted. On the other handthemang berisi years than this Machine proposal is not acceptable c. Which machine should the firm accept? Why? of both machines are not independent projects the Machine 1 should be accepted, became the periode.compared to Machine 2 d. Do the machines in this problem illustrate any of the weaknesses of using payback Discuss One of the weaknew of payback period is that it ignores cash flows after the cutoff das Due the reseaba period in the label against long term projects like machne 2. Moreover Machine will give the cash inflows for 20 years, so time of money in Loterm inflowscase 4000 4000 4000 4000 4000