Explain NPV, IRR, Profitability Index, and Payback period as investment selection criteria. What are the benefits and drawbacks of each?
2. Consider the following cash flows for years 0-4, respectively: -$1,512; $8,586; -$18,210; $17,100; -$6,000.
a. How many IRRs are there? What are they?
b. When do you think this project should be pursued?
3. Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,900,000 and will last for six years. Variable costs are 35% of sales and fixed costs are $170,000 per year. Machine B costs $5,100,000 and will last for nine years. Variable costs for this machine are 30% of sales and fixed costs are $130,000 per year. The sales for each machine will be $10 million per year. The required return is 10% and the tax rate is 35%. Both machines will be depreciated straight-line over their lifetimes.
a. What are the equivalent annual costs of each machine?
b. Which machine should Vandalay Industries select?