Question
Titos is considering investing in a new and sophisticated bottle filler machine at an initial cost of $100,000. After close examination of the investment proposal,
Titos is considering investing in a new and sophisticated bottle filler machine at an initial cost of $100,000. After close examination of the investment proposal, the firms CFO has determines that the expected after-tax cash flows from this operation for the next 5 years will be as followed:
Year Cash Flow
1 $10,000
2 $40,000
3 $40,000
4 $40,000
5 $10,000
Under which of the following decision rules will this project be accepted by titos? Which decision rules are associated with a project rejection? Show all formulas and calculations. Explain your acceptance/rejection decisions for each of the investment rules below.
a. Payback Rule; three year cut-off point.
b. Discounted Payback Rule; three year cut-off point; assume that the discount rate, r=7%
c. Internal Rate of Return Rule; 7% required internal rate of return.
d. Net Present Value Rule.(Assume a 5% discount rate)
e. Profitability Index Rule. (Assume a 5% discount rate)
f. The most appropriate rule.
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