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Chapter 26: Q5RQ (page 1463)
List some common cash inflows from capital investments.
Investment, cash operating cost savings, and any future residual.
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How does compound interest differ from simple interest?
How is IRR calculated with unequal net cash inflows?
How can spreadsheet software, such as Excel, help with sensitivity analysis?
Use the NPV method to determine whether Hawkins Products should invest in the
following projects:
• Project A: Costs \(285,000 and offers seven annual net cash inflows of \)55,000. Hawkins Products requires an annual return of 14% on investments of this nature.
• Project B: Costs \(395,000 and offers 10 annual net cash inflows of \)77,000. Hawkins Products demands an annual return of 12% on investments of this nature.
Requirements
1. What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places.
2. What is the maximum acceptable price to pay for each project?
3. What is the profitability index of each project? Round to two decimal places.
What is the decision rule for NPV?
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