SMG FE 101 Lecture 3: Annuities practice problems
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Paradigm Ltd is a company that manufactures glass bottles for the beverage industry in South Africa. Paradigm has recently raised $500,000 from the right issues. The directors of Paradigm is considering three projects (A, B and C) each of which consists of purchasing new equipment for the manufacturing of theses glass bottles. The equipment in each project will have equal to life of the project with no scrap value at the end.
Assume that the following information is available on the three projects
Net Cash flows ($'000) over the years
Project | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | |
A | -500 | 112 | 100 | 115 | 145 | 100 | 140 | 165 | |
B |
| 100 | 115 | 140 | 140 | 135 | |||
C |
| 150 | 140 | 125 | 125 |
Required:
1. Calculate the payback period for each project
2. Calculate the accounting rate of return for each project
Round calculations to two decimal places
Company A has the opportunity to do any, none, or all of the projects for which the net cash flows per year are shown below. Projects A and C can be done together. Projects B and C can be done together. But Projects A and B are mutually exclusive. The company has a cost of capital of 18%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work.
A | B | C | |
0 | -500 | -500 | -600 |
1 | 200 | -200 | 100 |
2 | 200 | 600 | 100 |
3 | 200 | 400 | 100 |
4 | 200 | 200 | 100 |
5 | 200 | -300 | 100 |
6 | 200 | 100 | |
7 | -300 | 100 |