De Luca Company is considering two possible investments, each of which requires

$13.00

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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