Learning Materials
Features
Discover
Chapter 26: Q5SE (page 1465)
Using the payback method to make capital investment decisions
Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4. Compute the payback for the expansion project. Round to one decimal place.
The payback period is4.1 years.
Over 30 million students worldwide already upgrade their learning with 91影视!
All the tools & learning materials you need for study success - in one app.
Get started for free
What is capital rationing?
Explain the difference between the present value factor tables鈥擯resent Value of \(1 and Present Value of Ordinary Annuity of \)1.
Hayes Company is considering two capital investments. Both investments have an initial cost of \(10,000,000 and total net cash inflows of \)17,000,000 over 10 years. Hayes requires a 12% rate of return on this type of investment. Expected net cash inflows are as follows:
Year | Plan Alpha | Plan Beta |
1 | \( 1,700,000 | \) 1,700,000 |
2 | 1,700,000 | 2,300,000 |
3 | 1,700,000 | 2,900,000 |
4 | 1,700,000 | 2,300,000 |
5 | 1,700,000 | 1,700,000 |
6 | 1,700,000 | 1,600,000 |
7 | 1,700,000 | 1,200,000 |
8 | 1,700,000 | 800,000 |
9 | 1,700,000 | 400,000 |
10 | 1,700,000 | 2,100,000 |
Total | \( 17,000,000 | \) 17,000,000 |
Requirements
Use Excel to compute the NPV and IRR of the two plans. Which plan, if any, should the company pursue?
Explain the relationship between NPV and IRR. Based on this relationship and the company鈥檚 required rate of return, are your answers as expected in Requirement 1? Why or why not?
After further negotiating, the company can now invest with an initial cost of $9,500,000 for both plans. Recalculate the NPV and IRR. Which plan, if any, should the company pursue?
Henderson Manufacturing, Inc. has a manufacturing machine that needs attention. The company is considering two options. Option 1 is to refurbish the current machineat a cost of \(1,200,000. If refurbished, Henderson expects the machine to last anothereight years and then have no residual value. Option 2 is to replace the machine at acost of \)4,600,000. A new machine would last 10 years and have no residual value.Henderson expects the following net cash inflows from the two options:
YearRefurbish CurrentPurchase New
MachineMachine
1 \( 350,000 \) 3,780,000
2 340,000 510,000
3 270,000 440,000
4 200,000 370,000
5 130,000 300,000
6 130,000 300,000
7 130,000 300,000
8 130,000 300,000
9 300,000
10 300,000
Total \( 1,680,000 \) 6,900,000
Henderson uses straight-line depreciation and requires an annual return of 10%.
Requirements
1. Compute the payback, the ARR, the NPV, and the profitability index of these twooptions.
2. Which option should Henderson choose? Why?
What is the decision rule for payback?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Flashcards 
91影视 AI 
Notes 
Study Plans 
Study Sets 
Find a degree 
Magazine