ON AN EXCEL SPREADSHEET:

You are offered an asset that costs $14,000 and has cash flows as follows below at the end of each quarter for the next 8 years. Then it will be sold for $2,500. Your cost of capital is 6.5 percent. An alternative (mutually exclusive) project is available which offers an accounting rate of return of 8%, a classical payback period of 5 years and a discounted payback period of 5 years.

Year 1: $800 each quarter

Year 2: $850 each quarter

Year 3: $850 each quarter

Year 4: $950 each quarter

Year 5: $800 each quarter

Year 6: $600 each quarter

Year 7: $500 each quarter

Year 8: $400 each quarter

• What is the IRR of the asset?
• What is the NPV of the asset?
• What are the PI and NPI of the asset?
• What are the classical and discounted payback periods?
• What are the four accounting rate of returns (utilizing cash flows)?
• Should you purchase it? Base your answer on your solutions to partsa and b (IRR and NPV)and explain why.

(Use your calculator to make sure that the answers are correct. Read chapter 19 before you start doing the problem.)