Answer Happy

QUESTION 2 Although projects A and B below have the same initial cost ($35,000) their cash flows perform differently over the four-year period, Year Cash-Flow Machine A Cash-Flow Machine B ($35,000) (535,000) $ 20,000 $ 10,000 $ 15,000 $ 10,000 3 S 10,000 $ 15,000 S 10,000 $ 20,000 Calculate the Payback period for machines A and B to determine how long it will take to recover the initial outlay. Rank the machines by the shortest Payback period and giving reasons, state which machine is selected in preference to the other. 0 1 2 4 QUESTION 3 NET PRESENT VALUE (NPV) Consider the data in Question 2. Assuming that the discounting factor is 20%, construct a table for NPV by calculating the present value - multiplying cash flow by discount factor. Determine the NPV for both machines. Giving reasons, state which machine is selected in preference to the other. QUESTION 4 INTERNAL RATE OF RETURN (IRR) - discounted cash flow technique (DCF) The IRR is the value of the discount factor when the NPV is zero. Consider the data in Question 2. Construct a table for each machine and using a trial and error method, calculate the IRR by increasing the discounting factor until NPV becomes negative. It is assumed that the costs are committed at the end of the year and these are the only costs during the year. NB:The IRR analysis is a measure of the return on investment and allows the project manager to compare IRR with the current interest rates. Therefore, select the project with the highest IRR. In this case, which machine is preferred?