QUESTIONS Sveta Pace is trying to understand the term cost of capital." Define the term, and indicate its relevance to the decision rule under the annual rate of return technique 2. What are the advantages and disadvantages of the cash payback technique? 3. What is the decision rule under the net present value method? 4. El Cajon Company uses the internal rate of return method. What is the decision rule for this method? EXERCISES 1. Doug's Custom Construction Company is considering three new projects, each requiring an investment of $22,000. Each project will last for 3 years. Each project has the following estimated annual cash inflows Year $7,000 9,000 2,000 $28,000 S10,000 0,000 10,000 S30,000 $13,000 12,000 11,000 $36,000 2 Total The equipments' salvage values are zero and straight-line depreciation is used. Doug will not accept any project with a cash payback period over 2 years. Doug's required rate of return is 24% and the cost of capital is 12% Instructions (a) For each of the three projects, compute the payback period and determine which projects are acceptable (b) For each of the three projects, compute the net present value using the cost of capital as the discount rate and determine which projects are acceptable QUESTIONS Sveta Pace is trying to understand the term cost of capital." Define the term, and indicate its relevance to the decision rule under the annual rate of return technique 2. What are the advantages and disadvantages of the cash payback technique? 3. What is the decision rule under the net present value method? 4. El Cajon Company uses the internal rate of return method. What is the decision rule for this method? EXERCISES 1. Doug's Custom Construction Company is considering three new projects, each requiring an investment of $22,000. Each project will last for 3 years. Each project has the following estimated annual cash inflows Year $7,000 9,000 2,000 $28,000 S10,000 0,000 10,000 S30,000 $13,000 12,000 11,000 $36,000 2 Total The equipments' salvage values are zero and straight-line depreciation is used. Doug will not accept any project with a cash payback period over 2 years. Doug's required rate of return is 24% and the cost of capital is 12% Instructions (a) For each of the three projects, compute the payback period and determine which projects are acceptable (b) For each of the three projects, compute the net present value using the cost of capital as the discount rate and determine which projects are acceptable