Question 1: A machine cost $ 4,000. It lasts 2 years and has no scrap value (that is, it has no value at the end of those two years of use). In each year, it produces $ 2400 in income. Should the firm invest in the machine if the interest rate is 10%? Should the firm invest in the machine if the interest rate is 20%? Why? What if the machine's scrap value was $350?
Question 2: Wiley Coyote has been retained to analyze two new projects for the Acme Company. Each project has a cost of $10,000, and the cost of capital for both projects is 12%. The projects net cash flows are as follows:
Year Project 1 Project 2
0 (10,000) (10,000)
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
a) Calculate each project's nominal payback period, net present value (NPV), and internal rate of return (IRR)
b) Should both projects be accepted if they are interdependent?
c) Which project should be accepted if they are mutually exclusive?
d) Why does a conflict exist between NPV and IRR rankings?
Question 3:
In the first year, Bubba's Pork Rind factory sold $ 100,000. A mere 13 years later, Bubba sold $ 475,000. What is the compound growth rate? If Bubba's sales growth continued unabated, what would Bubba's sales be after the next 13 years?
If, in the above, the initial period had been 10 years, what would the compound growth rate have been then? What would you expect the sales to be after 16 more years?