Accounting 210 – Final Exam Bonus Problem

Accounting 210 – Final Exam Bonus Problem (worth 25 points)

Name: ____________________________________________
Answer all parts:  Namerof Manufacturing, Inc. is considering purchasing three machines.  Each machine costs $8,000 and will product cash flows as follows:

End of                                      Machine
Year           A                      B                      C

   1        $5,000        $1,000        $4,500
   2        $4,000        $2,000        $3,000
   3        $2,000        $11,000        $2,200


Namerof uses the net present value method to make investment decisions and requires a 15% annual return on its investments.

If Namerof is limited to one investment per year, which machine, if any, should the company purchase?

If Namerof is not limited to one investment and will invest as long as its hurdle rate is achieved, which machine, if any, should the company purchase?  Why?


If Namerof used the payback period method and could only invest in one machine, which would they choose.  Do you think this would yield the most value for their investment? (Why/why not?)