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EXERCISE 14-1 Payback Method 1014-1 The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows Year Investment Cash Inflow 1 $15,000 $1,000 2 $8,000 $2,000 3 $2,500 $4,000 $5,000 $6,000 $5,000 $4,000 $3,000 7 8 9 10 $2,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year were several times as largo? EXERCISE 142 Net Present Value Analysis L014-2 The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 per year. At the end of the machine's five-year useful life, it will have zero salvage value. The company's required rate of return is 12%. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? EXERCISE 14-3 Internal Rate of Return 1014-3 Wendell's Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would Page 670 permit the company to reduce the amount of part-time help needed, at a cost savings of $3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of $1.20 per dozen donuts sold. The new machine would have a six-year useful life. Required: 1. What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? 2. What discount factor should be used to compute the new machine's internal rate of return? 3. Using Exhibit 14B-2 in Appendix 148 as a reference, what is the new machino's internal rate of return to the nearest whole percent? 4. In addition to the data given previously, assume that the machine will have a $9,125 salvage value at the end of six years. Under these conditions, what is the internal rate of return to the nearest whole percent? (Hint: You may find it helpful to use the net present value approach: find the discount rate that will cause the net present value to be closest to zero.) EXERCISE 14-7 Net Present Value Analysis of Two Alternatives @L014-2 Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Page 671 Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project Project A Project B $100,000 $0 $0 $100,000 $21,000 $16,000 $8,000 $0 6 years 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14% Required: 1. Compute the niet present value of Project A. 2. Compute the net present value of Project B. 3. Which investment alternative (if either) would you recommend that the company accept