Chapter 26 Capital Investment Decisions Demonstration Problems © 2016 Pearson Education, Inc.26-1.

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Presentation transcript:

Chapter 26 Capital Investment Decisions Demonstration Problems © 2016 Pearson Education, Inc.26-1

E26-19 Rapp Hardware is adding a new product line that will require an investment of $1,418,000. Managers estimate that this investment will have a 10-year life and generate net cash inflows of $310,000 the first year, $290,000 the second year, and $250,000 each year thereafter for eight years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Inc.26-2

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E26-24 Use the NPV method to determine whether Juda Products should invest in the following projects: Project A: Costs $290,000 and offers seven annual net cash inflows of $57,000. Juda Products requires an annual return of 14% on investments of this nature. Project B: Costs $395,000 and offers 10 annual net cash inflows of $70,000. Juda Products demands an annual return of 14% on investments of this nature. Requirements 1.What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. 1.What is the maximum acceptable price to pay for each project? 1.What is the profitability index of each project? Round to two decimal places. © 2016 Pearson Education, Inc.26-20

E26-24 Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. © 2016 Pearson Education, Inc.26-21

E26-24 Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. © 2016 Pearson Education, Inc.26-22

E26-24 Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. © 2016 Pearson Education, Inc.26-23

E26-24 Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. © 2016 Pearson Education, Inc.26-24

E26-24 Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. © 2016 Pearson Education, Inc.26-25

E26-24 Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. © 2016 Pearson Education, Inc.26-26

E26-24 Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. © 2016 Pearson Education, Inc.26-27

E26-24 Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. © 2016 Pearson Education, Inc.26-28

E26-24 Requirement 2: What is the maximum acceptable price to pay for each project? © 2016 Pearson Education, Inc.26-29

E26-24 Requirement 2: What is the maximum acceptable price to pay for each project? The maximum acceptable price to pay is $244,416 for Project A and $395,500 for project B (the total present value of net cash inflows from each project, calculated in Requirement 1). © 2016 Pearson Education, Inc.26-30

E26-24 Requirement 3: What is the profitability index of each project? Round to two decimal places. © 2016 Pearson Education, Inc.26-31

E26-24 Requirement 3: What is the profitability index of each project? Round to two decimal places. © 2016 Pearson Education, Inc.26-32

E26-24 Requirement 3: What is the profitability index of each project? Round to two decimal places. © 2016 Pearson Education, Inc.26-33

E26-24 Requirement 3: What is the profitability index of each project? Round to two decimal places. © 2016 Pearson Education, Inc.26-34

End of Chapter 26 © 2016 Pearson Education, Inc.26-35