Question

Medical Technology Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. and the company’s cost of capital (WACC) is 8%. Their future cash flows follow: (See pages 383 – 390).

  

Year	Alternative A ($)	Alternative B (S)	Alternative C ($)	Alternative D ($)
1	10,000	50,000	25,000	0
2	20,000	40,000	25,000	0
3	30,000	30,000	25,000	45,000
4	40,000	0	25,000	55,000
5	50,000	0	25,000	60,000

Evaluate and rank each alternative based on (PLEASE SHOW YOUR WORK):

a) Payback period,

            Alternative A: ___________________          Rank (1^st, 2^nd, 3^rd): ______________

            Alternative B: ___________________          Rank (1^st, 2^nd, 3^rd): ______________

            Alternative C: ____________________        Rank (1^st, 2^nd, 3^rd): ______________

b) Net present value (use a 8% discount rate),

Alternative A: ___________________          Rank (1^st, 2^nd, 3^rd): ______________

            Alternative B: ___________________          Rank (1^st, 2^nd, 3^rd): ______________

            Alternative C: ____________________        Rank (1^st, 2^nd, 3^rd): ______________

c) Internal rate of return.

Alternative A: ___________________          Rank (1^st, 2^nd, 3^rd): ______________

            Alternative B: ___________________          Rank (1^st, 2^nd, 3^rd): ______________

            Alternative C: ____________________        Rank (1^st, 2^nd, 3^rd): ______________

Answer 1

WACC	0.08
Initial investment	100,000.00	100,000.00	100,000.00	100,000.00
Year	Alternative A ($)	Alternative B (S)	Alternative C ($)	Alternative D ($)
1	10,000.00	50,000.00	25,000.00	0.00
2	20,000.00	40,000.00	25,000.00	0.00
3	30,000.00	30,000.00	25,000.00	45,000.00
4	40,000.00	0.00	25,000.00	55,000.00
5	50,000.00	0.00	25,000.00	60,000.00
Payback period	4.00	2.33	4.00	4.00
Rank	2.00	1.00	2.00	2.00
NPV	13,651.36	4,404.82	-182.25	16,984.08
Rank	2	3.00	4.00	1.00
Initial investment
Year	Alternative A ($)	Alternative B (S)	Alternative C ($)	Alternative D ($)
0	-100000	-100000	-100000	-100000
1	10000	50000	25000	0
2	20000	40000	25000	0
3	30,000.00	30,000.00	25,000.00	45,000.00
4	40,000.00	0.00	25,000.00	55,000.00
5	50,000.00	0.00	25,000.00	60,000.00
IRR	12.01%	10.65%	7.93%	12.29%
RAnk	2.00	3.00	4.00	1.00