Please complete the following exercises and/or problems from the textbook:
Prepare your answers in an Excel workbook, using one worksheet per exercise or problem.
E26-19 Using payback to make capital investment decisions
Robinson Hardware is adding a new product line that will require an investment
of $1,454,000. Managers estimate that this investment will have a 10-year life and
generate net cash inflows of $300,000 the first year, $270,000 the second year,
and $260,000 each year thereafter for eight years. Compute the payback period.
Note: Exercise S26-19 must be completed before attempting Exercise S26-20.
E26-20 Using ARR to make capital investment decisions
Refer to the Robinson Hardware information in Exercise E26-19. Assume the
project has no residual value. Compute the ARR for the investment. Round to
E26-21 Using the time value of money
Janice wants to take the next five years off work to travel around the world. She
estimates her annual cash needs at $28,000 (if she needs more, she will work odd
jobs). Janice believes she can invest her savings at 8% until she depletes her funds.
1. How much money does Janice need now to fund her travels?
2. After speaking with a number of banks, Janice learns she will only be able to
invest her funds at 4%. How much does she need now to fund her travels?
E26-24 Using NPV and profitability index to make capital investment decisions
Use the NPV method to determine whether Kyler Products should invest in the
P26-38 Using payback, ARR, NPV, and IRR to make capital investment
This problem continues the Davis Consulting, Inc. situation from Problem P25-34
of Chapter 25. Davis Consulting is considering purchasing two different types of
servers. Server A will generate net cash inflows of $25,000 per year and have a zero
residual value. Server A’s estimated useful life is three years and it costs $40,000.
Server B will generate net cash inflows of $25,000 in year 1, $11,000 in year 2,
and $4,000 in year 3. Server B has a $4,000 residual value and an estimated life of
three years. Server B also costs $40,000. Davis’s required rate of return is 14%.
1. Calculate payback, accounting rate of return, net present value, and internal
rate of return for both server investments. Use Microsoft Excel to calculate NPV
2. Assuming capital rationing applies, which server should Davis invest in?