1. A startup landscaping company has to determine the most prudent investment in new trucks and mowers. They narrow their choice to two sets. Which set will be better given that money is worth 7.25%?
Capital Required Set I Set II
Initial cost ($) 68,000 65,000
Life span (years) 12 11
Maintenance ($) 5,000 4,500
Residual value ($) 7,000 6,000
Initial cost ($) 68,000 65,000
Life span (years) 12 11
Maintenance ($) 5,000 4,500
Residual value ($) 7,000 6,000
2.Two investment proposals are submitted for approval of $25,000 each in initial investment. Their estimated profits after taxes are:
Year Proposal 1 ($) Proposal 2 ($)
1 2,500 6,000
2 3,300 4,900
3 4,000 4,200
4 5,200 3,150
5 6,100 2,000
Year Proposal 1 ($) Proposal 2 ($)
1 2,500 6,000
2 3,300 4,900
3 4,000 4,200
4 5,200 3,150
5 6,100 2,000
Make a capital budgeting decision using the average rate of return method
3. Suppose that another couple of proposals is submitted for capital allocation. They have the following cash inflows:
Year Proposal 1 ($) Proposal 2 ($)
1 10,000 5,500
2 10,500 5,500
3 4,200 5,500
4 1,900 5,500
5 1,580 5,500
Make a capital budgeting decision based on the payback period criteria if both projects require a $25,000 initial investment.
Year Proposal 1 ($) Proposal 2 ($)
1 10,000 5,500
2 10,500 5,500
3 4,200 5,500
4 1,900 5,500
5 1,580 5,500
Make a capital budgeting decision based on the payback period criteria if both projects require a $25,000 initial investment.
