Hi. It is a problem set of finance.
1) A new computer system will require an initial outlay of $20,000, but it will increase the firm?s
cash flows by $4,000 a year for each of the next 8 years. Is the system worth installing if the
required return is 9%? What if it is 14%? How high can the discount rate be before you would
reject the project?
2) First, calculate the payback period and NPV for all projects below. For all the projects, the
relevant discount rate is 10%. Then, comment on why the payback period provides misleading
information about the following:
a. Project A
b. Project B versus Project C
c. Project D versus Project E
d. Project D versus Project F
Year A B C D E F 0 - -1,000 -1,000 - -1,000 -1,000 1 1,000 100 400 500 400 500 2 200 300 500 400 500 3 300 200 500 400 10,000 4 400 100 400 5 500 500 400 3) You can purchase an optical scanner today for $400. The scanner provides benefits worth $60
a year. The expected life of the scanner is 10 years. Scanners are expected to decrease in price by
20% per year. Suppose the discount rate is 10%. Should you purchase the scanner today or wait
to purchase? What is the best purchase time?
4) You are operating an old machine that will last 2 more years before it dies. It costs $14,000
per year to operate. You can replace it with a new machine that costs $25,000 but is much more
efficient with $8,000 per year in operating costs and will last 5 years. Should you replace now or
wait? The opportunity cost of capital is 6.5%.
This question was answered on: Sep 18, 2020
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