a Payback Period

Net Initial Investment 1,500,000

Annual Cash Inflows (Savings) 300,000
Payback Period 5

b Accounting Rate of Return

Annual Savings 300,000

Annual Depreciation 187,500 (1,500,000 / 8)
Annual Net Savings 112,500
Divide: Average Investment 750,000 (1,500,000 / 2)
Accounting Rate of Return 0
1,500,000 / 8)

1,500,000 / 2)
Computation of Relevant Cash Flows

Net Initial Investment

Cost of New Machine

Purchase Price 1,800,000
Freight and Installation Costs 50,000 1,850,000
Addnl WC Requirements 120,000
Disposal Proceeds from Old Machine after Tax
Selling Price 500,000
Tax Benefit on loss of sale 75,000 !(575,000!)
Avoidable Cost if there is no investment
Repair cost of old machine 200,000
Tax effect of avoided cost !(60,000!) !(140,000!)
Net Initial Investment 1,255,000

Annual Cash Flows

Cash operating cost of old machine 1,030,000

Cash operating cost of new machine 557,000
Decrease in cash operating costs 473,000
Incremental depreciation 275,000
Total savings before tax 198,000
Income Tax 59,400
Total savings after tax 138,600
Incremental depreciation 275,000
Total Net Annual Cash Flows after tax 413,600

Termination Cash Flows

Sale of Machine
Salvage Value 200,000
Cost to Remove !(20,000!)
Tax Effect !(54,000!) 126,000

Recovery of WC 120,000
Total Termination Cash Flows after Tax 246,000
a Net Present Value
PV Factor (12%, 4 years) 0.6355
PVOA Factor (12%, 4 years) 3.0373

PV of Cash Inflows
PV of Annual Cash Inflows
Annual Cash Inflows 413,600
PV Factor 3.0373 1,256,248

PV of Termination Cash Flows

Termination Cash Flows 246,000
PV Factor 0.6355 156,337

Net Initial Investment !(1,255,000!)

Net Present Value 157,585

b Profitability index

PV of Cash Inflows 1,412,585

divide by: PV of Cash Outflows 1,255,000
1.13

c Net Present Value Index

Net Present Value 157,585

divide by: PV of Cash Outflows 1,255,000
0.13

d Discounted Payback Period

Year Cash Flow Discounted CF

0 !(1,255,000!) !(1,255,000!)
1 413,600 369,286
2 413,600 329,719
3 413,600 294,392
4 413,600 262,850
5 413,600 234,688

Year 3 Remaining Balance 261,603

Year 4 Discounted Cash Inflow 262,850
Fractional Year 0.995
First 3 years 3.000
Discounted Payback Period 3.995
Balance PV Factor
!(1,255,000!)
!(885,714!) 0.893
!(555,995!) 0.797
!(261,603!) 0.712
1,248 0.636
235,935 0.567
PV Factors a

8 years 10 years
Single Sum (6%) 0.62741 0.55839
Ordinary Annuity (6%) 6.20979 7.36009

Relevant Cash Flows

Mules Tractor
Net Initial Investment 1,000 10,000 b
Annual Net Cash Inflow 250 2,000

d
Net Present Value

Mules Tractor
PV of Annual Net Cash Inflow 1,552.45 14,720.17
Net Initial Investment 1,000.00 10,000.00
Net Present Value 552.45 4,720.17
Decision: Tractor

Internal Rate of Return

Net Initial Investment 1,000.00 10,000.00

divide by: Annual Net Cash Inflow 250.00 2,000.00
PV Factor 4.00 5.00

approx 18%-19% approx 15%-16%

IRR in PV Table
for 8 years for 10 years

4.07757 5.01877
3.95437 4.83323
Decision: Mules

Payback Period

Net Initial Investment 1,000.00 10,000.00

divide by: Annual Net Cash Inflow 250.00 2,000.00
Payback Period 4.00 5.00
Decision: Mules

Profitability Index

PV of Annual Net Cash Inflow 1,552.45 14,720.17

Net Initial Investment 1,000.00 10,000.00
Profitability Index 1.55 1.47
Decision: Mules
 Cash Inflows
Year PV Factors
P1 P2 P3
1 0.8929 65,000.00 100,000.00 80,000.00
2 0.7972 70,000.00 135,000.00 95,000.00
3 0.7118 80,000.00 90,000.00 90,000.00
4 0.6355 40,000.00 65,000.00 80,000.00

Capital for P4 (Priority 1)

Capital for P3 (Priority 2

 PV of Cash Inflows
Year
P4 P1 P2 P3
95,000.00 1 58,035.71 89,285.71 71,428.57
125,000.00 2 55,803.57 107,621.17 75,733.42
90,000.00 3 56,942.42 64,060.22 64,060.22
60,000.00 4 25,420.72 41,308.68 50,841.45
196,202.43 302,275.79 262,063.66
less: Initial Capital 200,000.00 298,000.00 248,000.00
NPV !(3,797.57!) 4,275.79 14,063.66
Priority 3 2

Available Capital 600,000.00

Capital for P4 (Priority 1) 272,000.00
Remaining 328,000.00
Capital for P3 (Priority 2 248,000.00
Remaining 80,000.00
ws
P4
84,821.43
99,649.23
64,060.22
38,131.08
286,661.97
272,000.00
14,661.97
1
 1
2
3
4
5
6
7
8
9
10

11 ARR = Annual Return / Average Investment

ARR = 10%
Annual Return = 20,000 - Depreciation
Average Investment = 106,700/2 = 53,350

10% = (20,000 - x) / 53,350

5, 335 = 20,000 - x
x = 14,665

Useful Life = 107,600 / 14,665

Useful Life = 7.28

12 Annual Operating Cash Income 70,000

Annual Operating Cash Expenses 20,000
Annual Net Cash Income 50,000
Annual Depreciation 20,000
Income before Tax 30,000
Income tax 12,000
Income after Tax 18,000
Annual Depreciation 20,000
Net cash flow after tax 38,000
x PVOA Factor (12%, 5 yrs) 3.6048
Present Value of Annual Cash Flows 136,981
Net Initial Investment 100,000
Net Present Value 36,981

13 Net Initial Investment 50,000

divide by: Annual Cash Inflows 7,791
PV Factor (x%, 10 yrs) 6.4177
IRR is nearest to 9%
14 CAPM r = rf + b x (rm-rf)
CAPM r = 5% + 1.8 (10%-5%)
CAPM r = 5% + 1.8 (5%)
CAPM r = 5% + 9%
CAPM r = 14%

PV Factor (14%, 10 yrs) = 0.2697

PVOA Factor (14%, 10 yrs) = 5.2161

Annual Cash Flows 12,000

PVOA Factor 5.2161
PV of Annual Cash Flows 62,593

Termination Cash Flow 20,000

PV Factor 0.2697
PV of Termination Cash Flow 5,395

Net Initial Investment 100,000

NPV !(32,012!)

15 PV Factor (10%, 5 years) 0.6209

PVOA Factor (10%, 5 years) 3.7908

Annual Cash Flows

Annual Pretax Cash Inflow 30,000
Annual Depreciation 20,000
Income before Tax 10,000
Income Tax 2,500
Income after Tax 7,500
Annual Depreciation 20,000
Annual After Tax Cash Flow 27,500
PVOA Factor 3.7908
PV of Annual After Tax Cash Flows 104,247

Net Initial Investment

Cost of Machine 100,000
WC Requirements 20,000 120,000

Termination Cash Flows

Recovery of WC 20,000
PV Factor 0.6209
PV of Recovery 12,418

NPV before Salvage Value !(3,335!)

 Required PV of After Tax Disposal Proceeds 3,335
divide by: PV Factor 0.6209
After Tax Proceeds before Discounting 5,371
divide by: 1-Tax 0.7500
Required Before Tax Proceeds from Disposal 7,161

16 NPV of gas-powered bus

PV Annual Cash Flows

Annual Cash Flows 22,000
PV Factor (16%, 8 years) 4.3436
PV of Annual Cash Flows 95,559

Net Investment
Year 0 55,000
End of Year 4
Investment 55,000
PV Factor (16%, 4 years) 0.5523 30,376

NPV of gas-powered bus

NPV of electric bus

PV Annual Cash Flows

Annual Cash Flows 28,000
PV Factor (16%, 8 years) 4.3436
PV of Annual Cash Flows 121,621

Net Investment
Year 0 90,000

NPV of electric bus

Better project: Electric bus with NPV of 31,620.55

17 Net Initial Investment 874,200

Annual Cash Flows 300,000
PVOA Factor 2.914

IRR is near/closest to 14%, thus, reject the project

18 Year Cash Flow Remaining
0 !(500,000!) !(500,000!)
1 150,000 !(350,000!)
2 175,000 !(175,000!)
3 125,000 !(50,000!)
4 100,000 50,000
5 100,000 150,000
6 100,000 250,000

Payback period is 3.5 years

Payback reciprocal = 1 / 3.5
Payback reciprocal = 28.57%

Initial
Project NPV
19 Investment
R 5,000 10,000
S 5,000 5,000
T 8,000 40,000
U 15,000 60,000
V 15,000 75,000
W 3,000 15,000

Maximum Capital 100,000

Project S 5,000
Project R 10,000
Project U 60,000
Remaining 25,000
Project W 15,000
10,000 not sufficient to cover the remaining p

20 Net Present Value !(2,000!) Reject

Payback Period
Capital investment 200,000
Annual Cash flows 65,000
Payback 3.077 Reject (higher than 3 payback requir
 10,183

31,621

.55
 Profitability
Rank
Index
1.50 2
2.00 1
1.20 4
1.25 3
1.20 4
1.20 4

ufficient to cover the remaining projects

ct (higher than 3 payback requirement)