Revised Spring 2018 Chapter 12 Review Questions
Practice Problem #3
C Company is investigating four different opportunities. Information on the four projects
under study is as follows:
Present value of cash
inflows
The company’s required rate of return is 10%; therefore a 10% discount rate has been
used in the present value computations above. Limited funds are available for
investment, so the company cannot accept all of the available projects.
Compute the profitability index for each investment project.
Rank the four projects according to preference, in terms of:
Practice Problem #4
S Company is considering the purchase of a new piece of equipment for laying sod.
Relevant information concerning the equipment follows:
Annual cost savings from new equipment
Life of the new equipment
Expected Annual Net Income
Compute the payback period for the equipment. If the company
requires a payback period of four years or less, would the equipment be
purchased?
Compute the annual rate of return on the equipment. Would the
equipment be purchased if the company’s required rate of return is
14%?
Practice Problem #5
P Company is considering a 5-year project. It plans to invest $62,000 now and it
forecasts cash flows for each year of $16,200. The company requires a minimum rate of
12%.
Calculate the internal rate of return to determine whether it should
accept this project.