Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10 % rate of return and has a required payback period of three years. Should Ginny accept this project? Justify your response. What are the major drawbacks of the Payback method ? What other method would you recommend to use and why?

Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10 % rate of return and has a required payback period of three years. Should Ginny accept this project? Justify your response. What are the major drawbacks of the Payback method ? What other method would you recommend to use and why?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 2PB: Markoff Products is considering two competing projects, but only one will be selected. Project A...

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Ginny Trueblood is considering an investment, which will cost her $120,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $35,000. This inflow will increase to $55,000, and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10% rate of return and has a required discounted payback period of three years. Should the project be accepted?
Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $16,000 at the end of each of the next 3 years. The opportunity requires an initial investment of $4,000 plus an additional investment at the end of the second year of $20,000. What is the NPV of this opportunity if the interest rate is 3% per year? Should Marian take it? The NPV of this opportunity is $____ (Round to the nearest dollar.)
Suppose she believes that the cash revenues from a new project will be $20,000 per year, assuming everything goes as expected. Cash costs (including taxes) will be $14,000 per year. She will wind down the project in eight years. The plant, property, and equipment will be worth $2,000 as salvage at that time. The project costs $30,000 to launch. She uses a 15 percent discount rate on new projects such as this one. Is this a good investment? If there are 1,000 shares of stock outstanding, what will be the effect on the price per share of taking this investment?
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Bill plans to open a service center. The equipment will cost $50,000. Bill expects the after-tax cash inflows to be $15,000 annually for 8 years, after which he plans to scrap the equipment and retire. Assume the required return is 10.00%. What is the project's Pl?