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You are offered an asset that costs $14,000 and has cash flows as follows below at the end of each quarter for the next 8 years. Then it will be sold for $2,500. Your cost of capital is 6.5 percent. An alternative (mutually exclusive) project is available which offers an accounting rate of return of 8%, a classical payback period of 5 years and a discounted payback period of 5 years. Year 1: $800 each quarter Year 2: $850 each quarter Year 3: $850 each quarter Year 4: $950 each quarter Year 5: $800 each quarter Year 6: $600 each quarter Year 7: $500 each quarter Year 8: $400 each quarter a) What is the IRR of the asset? b) What is the NPV of the asset? c) What are the PI and NPI of the asset? d) What are the classical and discounted payback periods? e) What are the four accounting rate of returns (utilizing cash flows)? f) Should you purchase it? Base your answer on your solutions to parts a through e a and b (IRR and NPV) and explain why. (Use your calculator to make sure that the answers are correct. Read chapter 19 before you start doing the problem.)

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Financial Management, Finance

Category:- Financial Management
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