question archive Payback comparisons Nova Products has a 4-year maximum acceptable payback period
Payback comparisons Nova Products has a 4-year maximum acceptable payback period
Subject:FinancePrice: Bought3
Payback comparisons Nova Products has a 4-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternatives. The first machine requires an initial investment of $9,000 and generates annual cash inflows of $2.000 for each of the next 12 years. The second machine requires an initial investment of $22.000 and provides an annual cash inflow of $5,000 for 20 years. a. Determine the payback period for each machine b. Comment on the acceptability of the machines, assuming that they are independent projects. c. Which machine should the firm buy? Why? d. Does this problem illustrate any of the payback method's weaknesses? ? a. The payback period for the first machine is years. (Round to two decimal places.) The payback period for the second machine is years. (Round to two decimal places.) b. Is the first machine acceptable? (Select the best answer below.) No Yes Is the second machine acceptable? (Select the best answer below.) No Yes C. Based on their payback periods, which machine should the firm accept? (Select the best answer below.) O A. Neither B. Machine 1 OC. Machine 2 d. Does this problem illustrate any of the payback method's weaknesses? (Select the best answer below.) O A. Machine 2 has returns that last 20 years while Machine 1 has only 12 years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period. B. Machine 2 has returns that last 20 years while Machine 1 has only 12 years of returns. Payback considers this difference; it includes all cash inflows beyond the payback period. OC. Machine 2 has returns that last only 12 years while Machine 1 has 20 years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period. OD. Machine 2 has returns that last 20 years while Machine 1 has only 12 years of returns. Payback considers only the first 12 years for each machine. NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $50,050, and the project will yield cash inflows of $7,000 per year for 13 years. The firm has a cost of capital of 9% a. Determine the net present value (NPV) for the project. b. Determine the internal rate of return (IRR) for the project. c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is $ (Round to the nearest cent.) b. The IRR of the project is %. (Round to two decimal places.) C. Would you recommend that the firm accept the project? (Select the best answer below.) No Yes
