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2.)    Recycle Paper Company utilizes the payback method to evaluate investment proposals.  It is presently considering two investment opportunities:

 

 

Investment A

Net Investment = $1000,000

 

Investment B

Net Investment = $500,000

 

 

 

 

 

 

Year

Expected

Cash inflows

 

 

Year

Expected

Cash inflows

1

$25,000

 

1

$125,000

2

25,000

 

2

250,000

3

25,000

 

3

300,000

4

25,000

 

4

225,000

5

25,000

 

5

100,000

6

10,000

 

6

25,000

7

5,000

 

7

0

 

(a)    Compute the payback period for each of the investments.

 

(b)   If the firm utilized a payback cutoff standard of three years which, if either, of the investments would be acceptable?

 

As a recent employee of Recycle Paper Company (above), you recognize the deficiencies of the payback method.  After deriving the firm’s required rate of return (cost of capital), you desire to illustrate alternative approaches to your boss.

 

(c)    Assuming a cost of capital of 14%, calculate the NPV of investment proposals A and B.

 

(d)               Should Recycle accept either of the investment proposals?

 


 

Subject Business
Due By (Pacific Time) 05/04/2013 08:22 pm
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