10: Cash Flow and Capital Budgetinga Use the information on the three mutually exclusive projects to determine which of those
three investments your company should accept on the basis of NPV.
b Which of the three mutually exclusive projects should the company accept on the basis of PI?
c If the three mutually exclusive projects are the only investments available, which one do you
select?
d Now given the availability of Project 4, the independent project, which of the mutually
exclusive projects do you accept? (Note: Remember, there is a $10 million budget constraint.)
Is the better technique in this situation the NPV or the PI? Why?P10-18 Semper Mortgage wishes to select the best of three possible computers, each expected to meet
the company’s growing need for computational and storage capacity. The three computers – A,
B and C – are equally risky. The company plans to use a 14% cost of capital to evaluate each of
them. The initial outlay and the annual cash outflows over the life of each computer are shown in
the following table.
Cash outflows (CFt)
Year (t) Computer A Computer B Computer C
0 –$50,000 –$35,000 –$60,000
1 7,000 5,500 18,000
2 7,000 12,000 18,000
3 7,000 16,000 18,000
4 7,000 23,000 18,000
5 7,000 — 18,000
6 7,000 — 18,000a Calculate the NPV for each computer over its life. Rank the computers in descending order,
based on NPV.
b Use the EAC method to evaluate and rank the computers in descending order, based on
the EAC.
c Compare and contrast your findings in parts (a) and (b). Which computer would you
recommend the company acquire? Why?P10-19 Seattle Manufacturing is considering the purchase of one of three mutually exclusive projects for
improving its assembly line. The company plans to use a 15% cost of capital to evaluate these
equal-risk projects. The initial outlay and the annual cash outflows over the life of each project
are shown in the following table.
Cash outflows (CFt)
Year (t) Project X Project Y Project Z
0 –$156,000 –$104,000 –$132,000
1 34,000 56,000 30,000
2 50,000 56,000 30,000
3 66,000 — 30,000
4 82,000 — 30,000
5 — — 30,000
6 — — 30,000
7 — — 30,000