Capital Budgeting: The payback period, NPV and Profitability Index

A company is considering replacing a five-year old machine that originally cost $50,000, presently has a book value of $25,000 and could be sold for $60,000. This machine is currently being depreciated using the simplified straight line method down to a terminal value of zero over the next five years, generating depreciation of $5,000 per year. The replacement machine would cost $125,000, and have a five year expected life over which it would be depreciated down using the simplified straight line method and have no salvage value at the end of five years. The new machine would produce savings before depreciation and taxes of $45,000 per year. Assuming a 34 percent marginal tax rate and a required rate of return of 10 percent, calculate:

1. The payback period

2. NPV

3. Profitability Index

Solution Preview

The calculations are in the attached file. The net cost of the new machine is the purchase price less the sale of old machine. The old machine is sold above the book value, we need to take the after tax income on sale. The net cost of the new machine ...

Solution Summary

The solution explains how to calculate the cash flows for a replacement project and calculate the payback period, NPV and profitability index.

Given the following project cash flows, identify the correct statement(s). The firm's cost of capital is 15%.
Cash Flow
0 -50
1 150
2 75
3 -10
I. This project will have two IRRs.
II. TheNPV of the project is $180.57.
III. Theprofitabilityindex of the project is 2.61.
IV. Thepayback period of

(10-1)
NPV
A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project's NPV (Hint: Begin by constructing a time line.)
(10-2)
IRR
Refer to Problem 10-1. What is the Project's IRR?
(10-3)
MIRR
Refer to Problem 10-1 What is t

Can someone help with the following question?
The following is stream of expect cash flows from a project to replace an old sail boat with a new one. The new boat will cost $15,000 and will be good for 5 years. It will be traded-in for another boat at the end of its useful life. The following cash flows are expected:
Ye

I need help in understanding the cost of capitaland how to figure it. Calculate the values for each project using the time value table- the cost of capital is 12%
1. NPV
2. IRR
3. Profitabilityindex
4.Payback Period
Year Project A Project B
0 $-30,000 $-60,000
1 $ 10,000 $20,000
2 $ 10,000 $20,000
3 $ 10,000 $20,

3.Comparing Investment Criteria Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule.
a. Payback period.
b. Average accounting return.
c. Internal rate of return.
d. Profitability i

There are two mutually exclusive projects under consideration by the
Stephen Company. The following is the expected cash flows from the
projects:
Year Project A Project B
0 -30,000 -60,000
1 10,000 20,000
2 10,000 20,000
3 10,000 20,000
4 10,000 20,000
5 10,000 20,000
The cost of capital is 14%.
Please calculate th

Note the following information on the annual cash flows of two mutually exclusive projects under consideration by Wang Food Markets, Inc.
Year A B
0 $-30,000 $-60,000
1 10,000 20,000
2 10,000 20,000
3 10,000 20,000
4 10,000 20,00

The attached spreadsheet has the inputs andcapital budget net cash flows analysis for an investment of $1,000,000 over 10 years, with a WACC of 7.67%.
1) Calculate the Net Present Value, IRR, ProfitabilityIndexandPayback Years for this capital budget.
2)Prepare a scenario analysis with the following data:
a) Base Case

Question 1
Assume you have just been promoted junior financial manager of a company. You are very smart and are planning to be promoted in the next 2-2.5 years. An associate of your company shows you a project with the following cash flows.
End of Year Cash Flows
0 -$100,000
1 $40,000
2 $40,000
3 $40,000
4 $40,000
5 -$