3. Calculating Payback. Global
Toys Inc., imposes a payback cutoff of three years for its international
investment projects. If the company has the following two projects available,
should it accept either of them?
Year Cash
Flow (A) Cash
Flow (B)
0 -$55,000 -$95,000
1 19,000 18,000
2 27,000 26,000
3 24,000 28,000
4 9,000 260,000
4. Calculating AAR. You’re
trying to determine whether or not to expand your business by building a new
manufacturing plant. The plant has an installation cost of $14 million, which
will be depreciated straight-line to zero over its four-year life. If the plant
has projected net income of $1,253,000, $1,935,000, $1,738,000, and $1,310,000
over these four years, what is the project’s average accounting return (AAR)?
5. Calculating IRR. A
firm evaluates all of its projects by applying the IRR rule. If the required
return is 11 percent, should the firm accept the following project?
Year Cash
Flow
0 -$153,000
1 78,000
2 67,000
3 49,000
6. Calculating NPV. For
the cash flows in the previous problem, suppose the firm uses the NPV decision
rule. At a required return of 9 percent, should the firm accept this project?
What if the required return was 21 percent?
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