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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
Instructions: Solve the following problems. Support your answer with computation in good form.
1. A business enterprise with a fixed capital spending budget of $250,000 needs to select a mix of acceptable projects from the following:
Projects Net Cash Inflows ($) Present Values ($)
A 70,000 112,000
B 100,000 145,000
C 110,000 126,500
D 60,000 79,000
E 40,000 38,000
F 80,000 95,000
REQUIRED:
a) Rank the projects using profitability index and Net Present Value index.
b) Which of the projects must be implemented? Support your answer with justification/s.
c) What other factors you consider very necessary that would possibly overturn your answer on letter b?
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2. SMS Industries, Inc. is considering two (2) machines to replace an old machine. Machine A has a life of 10 years. Its cost is $24,500,000 & will produce net cash savings of $4,800,000 per year. Machine B has an expected life of 5 years, will cost $20,000,000 & will produce a net cash savings of $6,000,000 per year. The company’s cost of capital is 14%.
REQUIRED:
a) Evaluate the financial attractiveness of the machines using at least 4 methods of evaluating long term investments.
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b) Which of the two(2) machines is more advantageous to your own agency. Justify your answer. You may indicate some qualitative factors you consider necessary in making your decision.
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