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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?
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.
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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