1. Chapter 26 Capital Investment Decisions Demonstration Problems © 2016 Pearson Education, Ltd. 26-1

2. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-2

3. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-3

4. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-4

5. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-5

6. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-6

7. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-7

8. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-8

9. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-9

10. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-10

11. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-11

12. Demonstration of E26-19 Lang, Inc., is adding a new product line that will require an investment of $780,000. Managers estimate that this investment will have an 8-year life and generate net cash inflows of $220,000 the first year, $160,000 the second year, and $150,000 each year thereafter for six years. Compute the payback period. Round to one decimal place. © 2016 Pearson Education, Ltd. 26-12

13. Demonstration of E26-19 © 2016 Pearson Education, Ltd. 26-13

14. Demonstration of E26-19 © 2016 Pearson Education, Ltd. 26-14

15. Demonstration of E26-19 © 2016 Pearson Education, Ltd. 26-15

16. Demonstration of E26-19 © 2016 Pearson Education, Ltd. 26-16

17. Demonstration of E26-19 © 2016 Pearson Education, Ltd. 26-17

18. Demonstration of E26-19 © 2016 Pearson Education, Ltd. 26-18

19. Demonstration of E26-24 Use the NPV method to determine whether Jade Products should invest in the following projects: Project A: Costs $380,000 and offers six annual net cash inflows of $98,000. Jade Products requires an annual return of 12% on investments of this nature. Project B: Costs $320,000 and offers seven annual net cash inflows of $60,000. Jade Products demands an annual return of 9% on investments of this nature. Requirements 1. What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. 2. What is the maximum acceptable price to pay for each project? 3. What is the profitability index of each project? Round to two decimal places. © 2016 Pearson Education, Ltd. 26-19

20. Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-20

21. Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. a Appendix B, Table B-2, Present Value of Annuity of $1 Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-21

22. Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. a Appendix B, Table B-2, Present Value of Annuity of $1 Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-22

23. Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. a Appendix B, Table B-2, Present Value of Annuity of $1 Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-23

24. Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. a Appendix B, Table B-2, Present Value of Annuity of $1 Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-24

25. Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. a Appendix B, Table B-2, Present Value of Annuity of $1 Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-25

26. Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. a Appendix B, Table B-2, Present Value of Annuity of $1 Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-26

27. Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. a Appendix B, Table B-2, Present Value of Annuity of $1 Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-27

28. Requirement 1: What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. a Appendix B, Table B-2, Present Value of Annuity of $1 The net present value of Project A is $22,878 and the net present value of Project B is $(18,020). Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-28

29. Requirement 2: What is the maximum acceptable price to pay for each project? Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-29

30. Requirement 2: What is the maximum acceptable price to pay for each project? The maximum acceptable price to pay is $402,878 for Project A and $301,980 for project B. (The total present value of net cash inflows from each project, calculated in Requirement 1.) Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-30

31. Requirement 3: What is the profitability index of each project? Round to two decimal places. Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-31

32. Requirement 3: What is the profitability index of each project? Round to two decimal places. a Calculated in Requirement 1. Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-32

33. Requirement 3: What is the profitability index of each project? Round to two decimal places. a Calculated in Requirement 1. Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-33

34. Requirement 3: What is the profitability index of each project? Round to two decimal places. The profitability index of Project A is 1.06 (rounded) and the profitability index of Project B is 0.94 (rounded). a Calculated in Requirement 1. Demonstration of E26-24 © 2016 Pearson Education, Ltd. 26-34