1) Consider the following two mutually exclusive projects: Assume your require a 15 percent return on your investment. a) If you apply the payback criterion, which investment will you choose? Why? Show your work. (5 marks) b) If you apply the discounted payback criterion, which investment will you choose? Why? Show your work. (7 marks) c) If you apply the NPV criterion, which investment will you choose? Why? Show your work. (7 marks) d) If you apply the IRR criterion, which investment will you choose? Why? Show your work. (10 marks) e) If you apply the profitability index criterion, which investment will you choose? Why? Show your work. (5 marks) f) Based on your answers in (a) through (e), which project will you finally choose? Why? (3 marks) 2) Bercelo Inc. is considering purchasing a new machine that will cost $900,000 plus an additional $45,000 in installation costs. Management estimates that the firm will obtain annual operating cash flows of $170,000 over the economic life of the project. The specifications of this machine indicate an economic life of ten years and management estimates that at the end of the economic life, the machine will have a salvage value of $60,000. This machine is in asset class 9 which has a CCA rate of 25%. The firm requires $65,000 in additional working capital to start up the project and management estimates that the $65,000 will be released at the end of the project. The firm?s required rate of return is 9% and the firm?s tax rate is 45%. If the asset class is expected to remain open at the end of the project, based on NPV analysis, should the project be undertaken? (18 Marks)

MOUNT SAINT VINCENT UNIVERSITY BUSI 3361(03 & 15 19) Winter 2015 Assignment #4 Total Value: 55 Marks Due: Wednesday April 1, 2015 at 4:30p.m. Please bring to class (on campus section), email it to suzanne.cottreau@msvu.ca or upload in Moodle) 1) Consider the following two mutually exclusive projects: Assume your require a 15 percent return on your investment. a) If you apply the payback criterion, which investment will you choose? Why? Show your work. (5 marks) b)If you apply the discounted payback criterion, which investment will you choose? Why? Show your work. (7 marks) c) If you apply the NPV criterion, which investment will you choose? Why? Show your work. (7 marks) d)If you apply the IRR criterion, which investment will you choose? Why? Show your work. (10 marks) e) If you apply the profitability index criterion, which investment will you choose? Why? Show your work. (5 marks) f) Based on your answers in (a) through (e), which project will you finally choose? Why? (3 marks) 2) Bercelo Inc. is considering purchasing a new machine that will cost $900,000 plus an additional $45,000 in installation costs. Management estimates that the firm will obtain annual operating cash flows of $170,000 over the economic life of the project. The specifications of this machine indicate an economic life of ten years and management estimates that at the end of the economic life, the machine will have a salvage value of $60,000. This machine is in asset class 9 which has a CCA rate of 25%. The firm requires $65,000 in additional working capital to start up the project and management estimates that the $65,000 will be released at the end of the project. The firm's required rate of return is 9% and the firm's tax rate is 45%. If the asset class is expected to remain open at the end of the project, based on NPV analysis, should the project be undertaken? (18 Marks)