Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Iceland Corporation Limited is considering investing in one of two machines – A or B. The initial cost and net
|
Cash Flow |
Machine A |
Machine B |
|
|
$ |
$ |
|
Initial Cost |
(6 000 000) |
(4 500 000) |
|
Net Cash Inflows |
|
|
|
Year 1 |
1 000 000 |
1 400 000 |
|
Year 2 |
1 300 000 |
1 600 000 |
|
Year 3 |
2 300 000 |
1 600 000 |
|
Year 4 |
1 200 000 |
1 600 000 |
|
Year 5 |
1 200 000 |
1 200 000 |
Discount factors at 10% per annum
|
Year |
Factor |
|
1 |
0.909 |
|
2 |
0.826 |
|
3 |
0.751 |
|
4 |
0.683 |
|
5 |
0.621 |
Required:
- Calculate the payback period for each machine.
- Based on the payback method, identify the project in which the company should invest, giving ONE reason for your choice.
- Calculate the
net present value (NPV) for machine A and machine B.
Based on the NPV, identify the machine that the company should invest in, giving ONE
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