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##### [solution] » 1. Suppose Palmer Properties is considering investing \$2 million today (i.e., C0 = -2,000,000) on a.

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1. Suppose Palmer Properties is considering investing \$2 million today (i.e., C0 = -2,000,000) on a.
More:1. Suppose Palmer Properties is considering investing \$2 million today (i.e., C0 = -2,000,000) on a new project that is expected to last for 8 years. The project is expected to generate annual cash flows of C1 = -250,000; C2 = 350,000, C3 = 500,000 and then \$600,000 for period C4 through C8. If the discount rate is 10% and management’s payback period cutoff is 5 years: (a) What is the payback period for the project? Show your work (b) What is the net present value of the project ? Show your work (c) What is the internal rate of return on the project ? Show your work (d) Under which method(s) above should the company accept the project (applying the acceptance rules)? Explain 2. The company is choosing between machine A and B (they are mutually exclusive and the company can only pick one). The initial cost of machine A is \$300,000 and it will last for 7 years before it needs to be replaced. The cost of operating machine A each year is \$50,000. The initial cost of Machine B is \$180,000 and it will last for 5 years before it needs to be replaced. The cost of operating machine B is \$70,000 in cash flow per year. If the required rate of return is 9%, (a) Calculate the 7 year and 5 year annuity factors at 9% annual interest. (b) Using the annuity factors, find the PV of Machine A and Machine B including all costs (initial + operating). (c) Which machine is a better choice for the company after considering the different lives of the projects? (Note: be sure to use the equivalent annual annuity method) Document Preview: 1. Suppose Palmer Properties is considering investing \$2 million today (i.e., C0 = -2,000,000) on a new project that is expected to last for 8 years. The project is expected to generate annual cash flows of C1 = -250,000; C2 = 350,000, C3 = 500,000 and then \$600,000 for period C4 through C8. If the discount rate is 10% and management’s payback period cutoff is 5 years:  (a) What is the payback period for the project? Show your work (b) What is the net present value of the project ? Show your work (c) What is the internal rate of return on the project ? Show your work (d) Under which method(s) above should the company accept the project (applying the acceptance rules)? Explain 2. The company is choosing between machine A and B (they are mutually exclusive and the company can only pick one). The initial cost of machine A is \$300,000 and it will last for 7 years before it needs to be replaced. The cost of operating machine A each year is \$50,000. The initial cost of Machine B is \$180,000 and it will last for 5 years before it needs to be replaced. The cost of operating machine B is \$70,000 in cash flow per year. If the required rate of return is 9%,  (a) Calculate the 7 year and 5 year annuity factors at 9% annual interest. (b) Using the annuity factors, find the PV of Machine A and Machine B including all costs (initial + operating). (c) Which machine is a better choice for the company after considering the different lives of the projects? (Note: be sure to use the equivalent annual annuity method)

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This question was answered on: Feb 21, 2020

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