29 Jun stion 11-47 De Luca Company is considering
Question
11-47
De Luca Company is considering two possible investments, each of which requires an initial investment of $12,000. Investment A will provide a cash flow of $3,000 at the end of each year for 4 years. Investment B will provide a cash flow of $2,000 at the end of each year for 10 years.
1. Determine the payback period for each investment. Which investment is most desirable using the payback method?
2. Compute the NPV of each investment using a desired rate of return 5%. Which investment is most desirable using the NPV method?
3. Explain why the payback method does not lead to an optimal decision for the De Luca Company.
11-48
The Jackson City Park department is considering the purchase of a new, more efficient pool heater for its Moorcroft Swimming Pool at a cost of $15,000. It should save $3,000 in cash operating costs per year. Its estimated useful life is 8 years, and it will have zero disposal value. Ignore taxes.
1. What is the payback time?
2. Compute the NPV if the minimum rate of return desired is 18%. Should the department buy the heater? Why?
3. Using the ARR model, compute the rate of return on the initial investment.
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