Question

# Section 7: Rank the following three investments (from best to worst) using the NPV method (assume...

Section 7:

Rank the following three investments (from best to worst) using the NPV method (assume a 17% cost of capital). Besides ranking them, also identify which of them are acceptable under the NPV method:

Investment A

Cost: \$100,000. Cash Flows: Year 1: \$45,000; Year 2: \$48,000; Year 3: \$55,000

Investment B

Cost: \$120,000. Cash Flows: Year 1: \$40,000; Year 2: \$38,000; Year 3: \$65,000

Investment C

Cost: \$150,000. Cash Flows: Year 1: \$55,000; Year 2: \$58,000; Year 3: \$65,000

Group of answer choices

Rank: 1--B (acceptable); 2--A (unacceptable); 3--C (unacceptable)

Rank: 1--B (acceptable); 2--C (acceptable); 3--A (unacceptable)

Rank: 1--C (acceptable); 2--A (unacceptable); 3--B (unacceptable)

Rank: 1--A (acceptable); 2--B (unacceptable); 3--C (unacceptable)

Tony Romy's BBQ Rib company is trying to decide whether to make an investment in a new smoker. The smoker will cost \$300,000. They will sell the old smoker for \$75,000. The old smoker has a book value of \$25,000. Tony's tax rate is 35%. What is the net cost of the investment in this case (for capital budgeting purposes)?

Group of answer choices

\$207,500

\$242,500

\$300,000

\$225,000

Paul's Pretzels Company is considering an investment in a new oven. The oven will cost \$50,000. Paul will sell the old oven for its current book value, \$5,000. Paul's tax rate is 35%. Using the 5-year MACRS depreciation method, calculate the depreciation for the new oven in year 2 of its residence at Paul's Pretzels.

Group of answer choices

\$9,000

\$14,400

\$10,000

\$16,000

Answer with working notes is given below