## Description

11-47

De Luca Company is considering two possible

investments, each of which requires an initial investment of $12,000.

Investment A will provide a cash flow of $3,000 at the end of each year for 4

years. Investment B will provide a cash flow of $2,000 at the end of each year

for 10 years.

1.

Determine the payback period

for each investment. Which investment is most desirable using the payback

method?

2.

Compute the NPV of each

investment using a desired rate of return 5%. Which investment is most

desirable using the NPV method?

3.

Explain why the payback method

does not lead to an optimal decision for the De Luca Company.

11-48

The Jackson City Park department is

considering the purchase of a new, more efficient pool heater for its Moorcroft

Swimming Pool at a cost of $15,000. It should save $3,000 in cash operating

costs per year. Its estimated useful life is 8 years, and it will have zero

disposal value. Ignore taxes.

1.

What is the payback time?

2.

Compute the NPV if the minimum

rate of return desired is 18%. Should the department buy the heater? Why?

3.

Using the ARR model, compute

the rate of return on the initial investment.

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