Fuji

The Payback Period Rule

3 Fuji Software, Inc., has the following mutually exclusive projects.

|Year |Project A |Project B |

|0 |-$7,500 |-$5,000 |

|1 |4,000 |2,500 |

|2 |3,500 |1,200 |

|3 |1,500 |3,000 |

a. Suppose Fuji’s payback period cutoff is two years. Which of these two projects should be chosen?

b. Suppose Fuji uses the NPV rule to rank these two projects. Which project should be chosen if the appropriate discount rate is 15 percent?

1. Suppose Peach Paving, Inc. invests $1 million today on a new construction project. The project will generate annual cash flows of $150,000 in perpetuity. The appropriate annual discount rate for the project is 10 percent.

a. What is the payback period for the project? If Peach Paving, Inc.’s cutoff is 10-years, should the project be accepted?

b. What is the discounted payback period for the project?

c. What is the NPV of the project?

The Average Accounting Return

2. Your firm is considering purchasing a machine with the following annual, end-of-year, book-investment accounts.

| |Purchase Date |Year 1 |Year 2 |Year 3 |Year 4 |

|Gross Investment |$16,000 |$16,000 |$16,000 |$16,000 |$16,000 |

|Less: Accumulated Depreciation | | | | | |

| |0 |4,000 |8,000 |12,000 |16,000 |

|Net Investment |$16,000 |$12,000 |$8,000 |$4,000 |$0 |

The machine generates, on average, $4,500 per year in...