Quentin Giordano owns a small retail ice cream parlor

Problem 16-17 Using the Payback Period and Unadjusted Rate of Return to Evaluate Alternative Investment Opportunities

Quentin Giordano owns a small retail ice cream parlor. He is considering expanding the business and has identifies two attractive alternatives. One involves purchasing a machine that would enable him to serve frozen yogurt to customers. The machine would cost $4,050 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $2,970 and $450, respectively.
Alternatively, he could purchase for $5,040 the equipment necessary to serve cappuccinos. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenue and cash operating expenses associated with selling cappuccinos are expected to be $4,140 and $1,215, respectively.
Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.

A. Determine the payback period and unadjusted rate of return (use average investment.) for each alternative.

B. Indicate which investment alternative you would recommend. Explain your choice.

Check:
a. Payback Period of the Yogurt Investment: 1.77 Years
Unadjusted Rate of Return of the Cappuccino Investment: 52.86%

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ADK Delivery is a small company that transports business packages between San Francisco and Los Angeles

Problem 16-16 Using Present Value Techniques to Evaluate Alternative Investment Opportunities

ADK Delivery is a small company that transports business packages between San Francisco and Los Angeles. It operates a fleet of small vans that move packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. ADK delivery recently acquired approximately $3 million of cash capital from its owners, and its president, Frank Hobb, is trying to identify the most profitable way to invest these funds.

AND SO ON

Check:
a. NPV of the vans investment: $75,608.57
b. NPV index of the trucks investment: 1.126

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Sophia Sweeny, the president of Sweeny Enterprises, is considering two investment opportunities

Problem 16-18 Using Net Present Value and Internal Rate of Return to Evaluate Investment Opportunities

Sophia Sweeny, the president of Sweeny Enterprises, is considering two investment opportunities. Because of limited resources, she will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $300,000 and for Project B are $120,000. The annual expected cash inflows are $94,641 for Project A and $39,507 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Sweeny Enterprise's cost of capital is 8 percent.

Required
A. Compute the net present value of each project. Which project should be adopted based on the net present value approach?
B. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?
C. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?

Check:
a. NPV of A: $13,463.01
b. Rate of Return of B: 12%

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