1.

The LMF Project Company is considering two new machines that should produce considerable cost
savings in its assembly operations. The cost of each machine is $14,000 and neither is expected to have
a salvage value at the end of a 4-year useful life. The LMF Project Company's required rate of return is
12% and the company prefers that a project return its initial outlay within the first half of the project's
life. The annual after-tax cash savings for each machine are provided in the following table (6 pts):

Year Machine A Machine B

1 $5,000 $8,000
2 5,000 6,000
3 5,000 4,000
4 5,000 2,000
Total $20,000 $20,000

Required:
a) Compute the payback period for each machine
b) Compute the net present value for each machine.
C) Which machine should be purchased?

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 Answer
a) Compute the payback period for each machine:
The payback period is the time it takes for the initial investment to be recovered from the
project's cash Inflows.
For Machine A: Initial investment = $14,000 Cumulative cash flows:
 Year 1: $5,000
 Year 2: $5,000 + $5,000 = $10,000 (cumulative)
 Year 3: $10,000 + $5,000 = $15,000 (cumulative)
 Year 4: $15,000 + $5,000 = $20,000 (cumulative)
Machine A reaches its initial investment of $14,000 within 3 years. Hence, the payback period for
Machine A is 3 Years.
For Machine B: Initial investment = $14,000 Cumulative cash flows:
 Year 1: $8,000
 Year 2: $8,000 + $6,000 = $14,000 (cumulative)
Machine B reaches its initial investment of $14,000 within 2 years. Hence, the payback period for Machine
B is 2 Years.
b) Compute the net present value (NPV) for each machine:
The formula for NPV involves discounting each cash flow to its present value and subtracting the initial
Investment.
NPV formula: NPV=∑ Cash Flow (1+r) t −Initial Investment
Where:
 r = discount rate (12% in this case)
 t = time period
Let's calculate NPV for each machine:
For Machine A:
 NPV = 5,000(1+0.12)❑1+5,000(1+0.12)❑2+5,000(1+0.12)❑3+5,000(1+0.12)❑4
−14,000(1+0.12)15,000+(1+0.12)25,000 +(1+0.12)35,000+(1+0.12)45,000−14,000
 NPV ≈ $16,637.74 - $14,000 = $2,637.74

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For Machine B:

 NPV = 8,000(1+0.12)❑1 +6,000(1+0.12)❑2+4,000(1+0.12)❑3+2,000(1+0.12)❑4

−14,000(1+0.12)18,000+(1+0.12)26,000+(1+0.12)34,000+(1+0.12)42,000−14,000

 NPV ≈ $17,032.61 - $14,000 = $3,032.61

c) Decision on which machine to purchase:
Both machines have positive NPVs, indicating that both would add value to the company. However, when
comparing NPVs, Machine B has a higher NPV ($3,032.61) compared to Machine A ($2,637.74).

Therefore, based on NPV, Machine B should be purchased as it generates a higher net present value,
which reflects greater profitability compared to Machine A.

2. Your firm is considering a project that requires an initial investment of $112,000 and will produce
positive cash flows of $2,400 per year in perpetuity (starting in one year). In addition to these cash
flows, you must consider the following: Assume that undertaking this project requires the use of an
existing machine. If the project is rejected, this old machine will last 9 more years before it needs to be
replaced with a new machine. However, if the project is accepted, the old machine will need to be
replaced in 6 years with a new machine. This new machine has more than enough capacity to handle
the new project and all other existing projects, will cost $45000 to purchase (either at t = 9 or t = 6) and
will cost $8600 per year to operate for the next 12 years (until t= 21 or t = 18). At the end of this 12-
year period, an identical machine with the same cash flows will be purchased. This will continue
forever. Assume that the figures presented are real cash flows. Therefore, the cash flows are the same
if the replacement machine is purchased at time 9 or time 6. Use a 3% real discount rate. As in the
example discussed in class, ignore the cash flows associated with maintaining and operating the
existing machine (6 pts).

1. Initially ignore the “cost of using the excess capacity” of the old machine. Using the
3% real discount rate, the initial investment of $112,000, and the expected cash flows
of $ 2,400 per year in perpetuity (starting in one year), what is the NPV of the
project?
2. What is the equivalent annual cash flow (EAC) for the new replacement machine?
Make sure you indicate whether the EAC is negative or positive.
3. What is the NPV of the project (after taking into account the additional costs
associated with having to buy the new machine at the end of the 6th year instead of
the end of the 9th year)?

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 Answer
1. Calculate the NPV of the project without considering the cost of using the excess capacity of the old
machine:

Given:
 Initial investment = $112,000
 Cash flows per year in perpetuity (starting in year 1) = $2,400
 Discount rate = 3%

Using the perpetuity formula for a cash flow starting in Year 1

NPV = Cash flow Discount rate = 2, 4000.03 = 80,000 NPV = Discount rate Cash flow = 0.032, 400 =
80,000
Therefore, the NPV of the project without considering the cost of using the excess capacity of the old
machine is $80,000.
2. Calculate the Equivalent Annual Cash Flow (EAC) for the new replacement machine:
For the new replacement machine:
 Initial cost = $45,000
 Operating cost per year for 12 years = $ 8,600
 Discount rate = 3%
 Cash flows in perpetuity are equivalent at t=9 and t=6
To find the EAC, we'll use the formula for the annuity that equates to the present value of the investment
cost and operating costs over the 12-year period:
EAC = PV of investment cost + PV of operating costs + PV annuity factor.
Calculate the present value (PV) of the investment and operating costs using the discount rate of 3%:
PV of investment cost = 45,000(1+0.03)6
PV of investment cost= (1+0.03)645,000
PV of operating costs = 8, 6000.03(1−1 (1+0.03)12)
PV of operating costs = 0.038, 600(1− (1+0.03)121)
PV annuity factor =1−1 (1+0.03)120.03
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 PV annuity factor = 0.031− (1+0.03)121

Then calculate the EAC using these values.

EAC = PV of investment cost + PV of operating costs + PV annuity factor
EAC =
3. Calculate the NPV of the project considering the cost of buying the new machine at the end of the
6th year instead of the 9th year:
To calculate this, adjust the cash flows by considering the cost of replacing the machine earlier. Subtract the
present value of the costs associated with buying the new machine at the end of the 6th year from the NPV
calculated earlier ($80,000) to find the revised NPV.

3. The PIHATO9 newly initiated project is considering the purchase of a new piece of equipment
for laying sod. Relevant information concerning the equipment follows (4 pts):

 Cost of the equipment $180,000

 Annual cost savings from new equipment $37,500
 Life of the new equipment 12 years
 Expected Annual Net Income $15,000

Required:
1. Compute the payback period for the equipment. If the company requires a payback period
of four years or less, would the equipment be purchased?
2. Compute the annual rate of return on the equipment. Would the equipment be purchased if
the company’s required rate of return is 14%

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Answer
Let's calculate the payback period and the annual rate of return for the equipment based on the
given information:
1. Compute the payback period for the equipment:
The payback period is the time it takes for the initial investment to be recovered from the
project's cash flows.
Given:
 Cost of the equipment = $180,000
 Annual cost savings from new equipment = $37,500
Payback Period Formula:
Payback Period=Initial InvestmentAnnual Cash FlowPayback Period=Annual Cash FlowInitial I
nvestment
In this case, the annual cash flow is the annual cost savings from the new equipment.
Payback Period: Payback Period=180, 00037, 500=4.8 years Payback Period=37, 500180,000
=4.8 years
The payback period for the equipment is 4.8 years, which exceeds the company's requirement of
four years or less.
2. Compute the annual rate of return on the equipment:
The annual rate of return (ARR) is calculated using the average annual net income divided by the
initial investment.
Given:
 Expected Annual Net Income = $15,000
 Cost of the equipment = $180,000
Annual Rate of Return Formula:
ARR=Average Annual Net IncomeInitial InvestmentARR=Initial InvestmentAverage Annual Ne
t Income
Average Annual Net Income: \text{Average Annual Net Income} = \frac{\text{Total Net
Income}}{\text{Life of the Equipment}} = \frac{15,000}{12} = $1,250
Annual Rate of Return: ARR=1, 250180, 000×100%=0.694%ARR=180, 0001,250
×100%=0.694%
The annual rate of return on the equipment is approximately 0.694%. If the company's required
rate of return is 14%, the equipment might not be purchased as the ARR is substantially lower
than the company's required rate of return.

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4. KRC Paper Corporation is considering adding another machine for the manufacture of
corrugated cardboard. The machine would cost $900,000. It would have an estimated life of 6
years and no salvage value. The company estimates that annual cash inflows would increase
by $400,000 and that annual cash outflows would increase by

$190,000. Management has a required rate of return of 9%.

Calculate the net present value on this project and discuss whether it should be accepted
or rejected
Answer
To calculate the Net Present Value (NPV) of the project, we'll use the formula:

( )
∞ t
Cash Flow
NPV =∑ t
−Inicial Investment
n=1 (1+ R)

Where:
 Cash Flow = Cash inflow - Cash outflow
 r = Discount rate (required rate of return)
 t = Time period
Given:
 Initial Investment = $900,000
 Estimated life of the machine = 6 years
 Annual cash inflows increase by 400,000
 Annual cash outflows increase by 190,000
 Required rate of return (discount rate) = 9%
Let's calculate the NPV of the project:
1. Calculate the annual net cash flow:
Net Cash Flow=Cash Inflows−Cash Outflows
‫؞‬Net Cash Flow = 400,000−190,000 = 210,000

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2. Use the NPV formula to find the present value of each cash flow:
210000
Year 1: 1 = 192,661.84
(1+0.09)
210000
Year 2: 2 = 176,882.28
(1+0.09)
210000
Year 3: 3 = 162,158.53
(1+0.09)
210000
Year 4: 4 = 148,769.29
(1+0.09)
210000
Year 5: 5 = 136,485.59
(1+0.09)
210000
Year 6: 6 = 125,216.14
(1+0.09)

2. Sum up the present values of all cash flows:

NPV = 192,661.84+176,882.28+ 162,158.53+148,769.29+136,485.59+125,216.14

= 942173.67

NPV = (NPV from cash flows) −Initial Investment

= 942,173.67- 900000 = 42,173.67
Based on the calculated NPV, if the value is positive, the project should be accepted as it
indicates that the present value of future cash flows exceeds the initial investment, meeting the
required rate of return. If the NPV is negative, the project may not meet the required return and
could be rejected.
Since the NPV is positive the project should be accepted.

5. Assume Project A has a present value of net cash inflows of $79,600 and an initial investment
of $60,000. Project B has a present value of net cash inflows of $82,500 and an initial investment

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of $75,000. Assuming the projects are mutually exclusive, which project should management
select and why?

4.

Answer
To decide between mutually exclusive projects, one common criterion is to choose the project
with the higher Net Present Value (NPV).

Given:

 Project A:
 Present Value of Net Cash Inflows = $79,600
 Initial Investment = $60,000
 Project B:
 Present Value of Net Cash Inflows = $82,500
 Initial Investment = $75,000
Let's calculate the NPV for each project using the formula:
NPV = Present Value of Net Cash Inflows − Initial Investment
For Project A: NPV A = 79,600 − 60,000 = 19,600
For Project B: NPV B = 82,500 − 75,000 = 7,500
Comparing the NPVs, Project A has and NPV of $19,600, while Project B has an NPV of
$7,500. Therefore, according to the NPV criterion, Management should select Project A over
Project B because it has a higher NPV, indicating that Project A generates more value in terms of
the present value of net cash inflows compared to its initial investment, making it the more
profitable choice.

5. Cornfield Company is considering a long-term capital investment project in laser

equipment. This will require an investment of $280,000, and it will have a useful life of 5
years. Annual net income is expected to be $16,000 a year. Depreciation is computed by
the straight-line method with no salvage value. The company’s cost of capital is 10%.
(Hint: Assume cash flows can be computed by adding back depreciation expense.)
(a) Compute the cash payback period for the project.

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Answer
The cash payback period represents the time it takes for a project's initial investment to be
recovered from the cumulative cash inflows generated by the project.
Given:
 Initial Investment = $280,000
 Annual Net Income = $16,000
 Useful Life of the project = 5 years
 Depreciation computed by the straight-line method with no salvage value
To calculate the cash payback period, we need to determine the cumulative net cash inflows until
the initial investment is recovered.
First, calculate the annual net cash inflow considering depreciation:
Annual Net Cash Inflow = Annual Net Income + Depreciation
Given that there is no salvage value and depreciation is computed by the straight-line method:
Depreciation per year = Initial Investment / Useful Life Depreciation per year
= $280,000 / 5 = $56,000 per year
Annual Net Cash Inflow = $16,000 (Net Income) + $56,000 (Depreciation)
Annual Net Cash Inflow = $72,000
Now, calculate the cumulative net cash inflows over the years:
Year 1: $72,000
Year 2: $72,000 * 2 = $144,000
Year 3: $72,000 * 3 = $216,000
Year 4: $72,000 * 4 = $288,000

The cumulative net cash inflows at the end of Year 4 exceed the initial investment of $280,000.
Therefore, the cash payback period falls within Year 4.

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Hence, the cash payback period for the project is less than 4 years, specifically within Year 4.

7) The Directors of the ETAF Football Club (a tax paying entity) are very concerned about the
club's lack of success over recent years. They are seriously considering the purchase of 20 new
football robots that are being manufactured in TENG.
These robots will replace 20 of the players the club fields each week. The robots cost $15,000
each, with an additional charge for painting in club colors and transporting them to the club's
home ground. This amounts to $2,500 per robot. The robots will be depreciated on a straight line
basis at twenty percent per annum.
The directors believe the robots, after being programmed to mark, handball and kick with both
feet, can win most of their games and so generate an additional $100,000 in gate receipts each
year. Not having to pay the current list of players will save the club an extra $30,000 a year.
The robots will have a playing career of five years, after which time their central processing
units can no longer think or see. They will then be sold off (for a total of $20,000) to a company
that paints them white, puts whistles in their mouths, and uses them as umpires. EHAF's
required rate of return is 12 percent and the corporate tax rate is 30%.
Calculate:
a) Net Present Value (NPV) b) Internal Rate of Return (IRR)
d) Payback Period e) Present Value Index
Answer
Given:
 Cost of each robot = $15,000 + $2,500 = $17,500
 Additional gate receipts per year = $100,000
 Savings from not paying players = $30,000
 Salvage value of robots after 5 years = $20,000
 Depreciation rate = 20% per annum (straight-line)
 Required rate of return = 12%
 Corporate tax rate = 30%
a) Net Present Value (NPV):
Calculate the annual cash inflows and outflows:
 Annual additional gate receipts = $100,000

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  Savings from not paying players = $30,000
 Depreciation per year = Initial cost / Useful life = $17,500 / 5 = $3,500
Net Cash Inflow per year = Additional gate receipts + Savings from not paying players -
Depreciation
Net Cash Inflow per year = $100,000 + $30,000 - $3,500 = $126,500
Now, calculate NPV using the formula:

( )
∞ t
Net Cash Flow
NPV =∑ t
−Inicial Investment
n=1 ( 1+ R)

Where:
 r = Discount rate (12%)
 t = Time period

126500 126500 126500 126500 126500

1 + 2+ 3+ 4+ 5 - Initial Investment
(1+0.12) (1+0.12) (1+0.12) (1+0.12) (1+0.12)

PV=126,500(1+0.12)1+126,500(1+0.12)2+⋯+126,500(1+0.12)5−Initial Investment
NPV= (1+0.12)1126, 500+ (1+0.12)2126, 500+⋯+ (1+0.12)5126, 500
−Initial Investment
b) Internal Rate of Return (IRR):
IRR is the discount rate that makes the NPV of the project equal to zero. This is
typically found using trial and error or software tools.
c) Payback Period:
The payback period is the time taken for the initial investment to be recovered from the
project's cash flows.
d) Present Value Index (PVI):
PVI is calculated as the ratio of the present value of future cash inflows to the initial
investment:
PVI=Present Value of Future Cash InflowsInitial Investment
Let me calculate these values for you based on the provided information.

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8. Discuss with some examples the concepts of the five stages of project team development
processes in not less than 3 pages (10 pts)
Answer
The five stages of team development are:
1. Forming
2. Storming
3. Norming
4. Performing
5. Adjourning
This team development framework, according to Tuckman, progresses in a natural and
fluid manner, each stage building on the one that preceded it and sometimes—as
explained in more detail below—reverting back to a previous stage before moving
forward.
1. Forming
The forming stage of team development is punctuated by excitement and anticipation.
Group members are on high alert, each wanting to put their best foot forward while, at
the same time, sizing up each other’s strengths and weaknesses.
In this initial phase of group interaction, individual members tend to behave
deferentially to one another. Because each new team member sees their role from the
perspective of individual performance, the group doesn’t accomplish much during this
stage.
This is a good time for the group leader or manager to open up discussions about the
team’s mission. It’s also a good time to address the ground rules, clearly stating what
the team norms should be while reviewing expectations for team dynamics.
2. Storming
All that polite, deferential behavior that dominated the forming stage starts to fall by the
wayside in the storming stage. Storming is where the metaphorical gloves come off, and
some team members clash personally, professionally, or both. One team member might
take offense at another’s communication style. Work habits might be at odds, and

13
perceptions about who is contributing what—and who might be left holding the bag—
begin to surface. Members might start to question team processes. They also might form
cliques. The result is likely to interfere with team performance and stall the team’s
progress.
This critical stage is a necessary evil in the formation of a successful team. Managers
and team leaders need to confront issues directly. Ignoring them could let minor
conflicts fester into major problems. In the end, however, team members will have to
come to a consensus about how to move forward as a team.
You can help the team break through the storming stage by encouraging members to
refocus on goals. Try breaking large goals down into smaller, more manageable tasks.
Then, work with the team to redefine roles and help them flex or develop their task-
related, group-management, and conflict-management skills.
3. Norming
You will know your team has entered the norming stage when small conflicts occur less
frequently and team members find ways to work together despite differences. Each
person begins to recognize how their fellow team members contribute to the group, and
that perspective—combined with a recommitment to the team’s objectives—helps
establish work patterns and accepted performance markers.
Some teams will toggle back and forth between the storming and norming stages. This
may happen if work priorities shift and team members are temporarily thrown off-kilter.
Given time, the storming will dissipate, and team members will come to appreciate how
individual performance and group performance overlap.
What should you do? Wait, watch, and intervene only where necessary. The group
needs to work out this dynamic organically. You can gently encourage team members to
engage in self-evaluation to determine whether there is room for process improvement,
but your primary focus should be on encouraging stability.‍
4. Performing
The relationships and interdependencies formed during storming and norming pay off in
the performing stage. By now, team members have honed their conflict-resolution
abilities and spend less time focused on interpersonal dynamics and more on team
effectiveness. This is where surges in creative problem-solving and idea generation
occur. The lines between individual performance and team success blur as the team
works to deliver results.
As momentum builds and each team member leans in to the team’s goals, productivity
—both personal and collective—begins to increase. This may be the perfect time to
evaluate team functions to increase productivity even more.

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Even as you push for greater productivity, you should make a point of rewarding the
team by showing confidence in their abilities, offering support for their methods and
ideas, and celebrating their successes.

5. Adjourning
Often, the adjourning stage brings up bittersweet feelings, as team members go about
the business of concluding the group’s functions. They start to focus on the details of
completing any deliverables, finalizing documentation, and meeting reporting
requirements. They might start looking toward their next assignments, leaving little
energy or enthusiasm for finishing the tasks at hand.
Management can help the team navigate through the adjourning phase by
acknowledging the team’s accomplishments and recognizing the difficulties that come
with tackling all the

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