P10–4 Long-term investment decision, payback method Bill Williams has the opportunity
to invest in project A that costs $9,000 today and promises to pay annual end-ofyear
payments of $2,200, $2,500, $2,500, $2,000, and $1,800 over the next 5 years.
Or, Bill can invest $9,000 in project B that promises to pay annual end-of-year payments
of $1,500, $1,500, $1,500, $3,500, and $4,000 over the next 5 years.
a. How long will it take for Bill to recoup his initial investment in project A?
b. How long will it take for Bill to recoup his initial investment in project B?
c. Using the payback period, which project should Bill choose?
d. Do you see any problems with his choice?
P10-10 NPV—Mutually exclusive projects Hook Industries is considering the replacement
of one of its old drill presses. Three alternative replacement presses are under consideration.
The relevant cash flows associated with each are shown in the following
table. The firm’s cost of capital is 15%.
Cost of Capital 15%
Year Press A Press B Press C
0 $85,000 $60,000 $130,000
1 $18,000 $12,000 $50,000
2 $18,000 $14,000 $30,000
3 $18,000 $16,000 $20,000
4 $18,000 $18,000 $20,000
5 $18,000 $20,000 $20,000
6 $18,000 $25,000 $30,000
7 $18,000 $40,000
8 $18,000 $50,000
P10-11 Long-term investment decision, NPV method Jenny Jenks has researched the financial
pros and cons of entering into an elite MBA program at her state university.
The tuition and needed books for a master’s program will have an upfront cost of
$100,000. On average, a person with an MBA degree earns an extra $20,000 per
year over a business career of 40 years. Jenny feels that her opportunity cost of capital
is 6%. Given her estimates, find the net present value (NPV) of entering this
MBA program. Are the benefits of further education worth the associated costs?
p10-15 Internal rate of return. Peace of Mind, Inc. (PMI), sells extended warranties for durable consumer goods such as washing machines and refrigerators. When PMI sells an extended warranty, it receives cash up front from the customer, but later PMI must cover any repair costs that arise. An analyst working for PMI is considering a warranty for a new line of big-screen TVs. A consumer who purchases the 2-year warranty will pay PMI $200. On average, the repair costs that PMI must cover will average $106 for each of the warranty’s 2 years. If PMI has a cost of capital of 7%, should it offer this warranty for sale?
p10-21 All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering
two mutually exclusive projects, each with an initial investment of $150,000.
The company’s board of directors has set a maximum 4-year payback requirement
and has set its cost of capital at 9%. The cash inflows associated with the two
projects are shown in the following table.
P10-24 All techniques—Decision among mutually exclusive investments Pound Industries
is attempting to select the best of three mutually exclusive projects. The initial
investment and after-tax cash inflows associated with these projects are shown in the