Payback, Accounting Rate of Return, Present Value, Net Present Value, Internal Rate of Return

For discount factors use Exhibit $12$B$\mathrm{.}1$ and Exhibit $12$B$\mathrm{.}2.$

All scenarios are independent of all other scenarios. Assume that all cash flows are after$-$tax cash flows.

Kambry Day is considering investing in one of the following two projects. Either project will require an investment of $$20,000.$ The expected cash flows for the two projects follow. Assume that each project is depreciable.

Year Project A Project B

$1$ $ $6,000$ $ $6,000$

$28,0008,000$

$310,00010,000$

$410,0003,000$

$510,0003,000$

Wilma Golding is retiring and has the option to take her retirement as a lump sum of $$450,000$ or to receive $$30,000$ per year for $20$ years. Wilma's required rate of return is $6\%.$

David Booth is interested in investing in some tools and equipment so that he can do independent drywalling. The cost of the tools and equipment is $$30,000.$ He estimates that the return from owning his own equipment will be $$9,000$ per year. The tools and equipment will last $6$ years.

Patsy Folson is evaluating what appears to be an attractive opportunity. She is currently the owner of a small manufacturing company and has the opportunity to acquire another small company's equipment that would provide production of a part currently purchased externally. She estimates that the savings from internal production will be $$75,000$ per year. She estimates that the equipment will last $10$ years. The owner is asking $$400,000$ for the equipment. Her company's cost of capital is $8\%.$

Required:

$1.$ Conceptual Connection: What is the payback period for each of Kambry Day's projects? Round your answers to two decimal places.

Line Item Description Answer

Project A fill in the blank $1$ years

Project B fill in the blank $2$ years

If rapid payback is important, which project should be chosen?

$2.$ Conceptual Connection: Which of Kambry's projects should be chosen based on the ARR? If required, round to the nearest percent.

Accounting rate of return $($ARR$)$:

Line Item Description Percentage

Project A: ARR fill in the blank $4\%$

Project B: ARR fill in the blank $5\%$

$3.$ Assuming that Wilma Golding will live for another $20$ years, should she take the lump sum or the annuity?

$4.$ Assuming a required rate of return of $8\%$ for David Booth, calculate the NPV of the investment. If required, round to the nearest dollar.

NPV fill in the blank $1$ of $1$$

Should David invest?

$5.$ Calculate the IRR for Patsy Folson's project. Round your answer to the nearest percent.

Should Patsy acquire the equipment?