Question

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 1

Answer with working notes is given below