Problem 10-20A (Algo) Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities LO 10-4 Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7.980 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,070 and $840, respectively. Alternatively, Mr. Fitch could purchase for $9,600 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,460 and $2,340, respectively. Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent. Required a. Determine the payback period and unadjusted rate of return (use average investment for each alternative. (Rourid your answers to 2 decimal places.) Payback period Unadjusted rate of return Alternative 1 1.60 years 58.41 % Alternative 2 1.81 years 60.77% Exercise 10-6A (Algo) Determining net present value LO 10-2 Aaron Heath is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Aaron expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows: Year of Operation Year 1 Year 2 Year) Year 4 Cash Inflow Cash Outflow $14,300 $ 9,800 19,400 11,500 21,500 12,900 21,500 12,900 In addition to these cash flows, Aaron expects to pay $21,000 for the equipment. He also expects to pay $3,600 for a major overhaul and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $1,200 salvage value and a four year useful ille. Aaron desires to earn a rate of return of 9 percent. (py of S1 and PVA OR$1) (Use approprlato factor(a) from the tables provided.) Required Calculate the net present value of the investment opportunity. (Negative amount should be Indicated by a minus algn. Round Intermediate calculations and final answer to 2 decimal places.) b. Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return and whether it should be accepted. a. Net present value b. We the return be above or below the cost of capital? Should the investment opportunity be accepted? Above Accepted