Chapter 11, Problem 13E

To determine

(a)

Introduction:

Payback period is the time period required to cover the cost of an investment or it is the duration of time needed to recover the initial cost of an investment.

To explain:

If the Payback period is enough for the company to decide to accept a project or not.

To determine

(b)

Introduction:

Net present value is calculated as the difference between present cash inflows and present cash outflows. A positive value of NPV states that the investment is profitable and negative value of NPV states that the investment will result in a loss.

To state:

The company will accept or reject the project, using NPV method.

To determine

(c)

Introduction:

Payback period is the time period required to cover the cost of an investment or it is the duration of time needed to recover the initial cost of an investment.

Net present value is calculated as the difference between present cash inflows and present cash outflows. A positive value of NPV states that the investment is profitable and negative value of NPV states that the investment will result in a loss.

To state:

The reason for a difference of statements in part 1 and part 2 and the advice that will help the management to take a better decision.

To determine

(d)

Introduction:

Net present value is calculated as the difference between present cash inflows and present cash outflows. A positive value of NPV states that the investment is profitable and negative value of NPV states that the investment will result in a loss.

To state:

The impact it will have on NPV, if company’s cost of capital was 10%.