Answers to Mini-Case Questions

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( Answers to Mini-Case Questions BioCom Inc. This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period, discounted payback period, NPV, IRR, MIRR, and PI. 1. Compute the payback period for each project. |Time of Cash Flow |Nano Test Tubes |Microsurgery Kit | |Investment |−$11,000.00 |−$11,000.00 | |Year 1 | 2,000.00 | 4,000.00 | |Year 2 | 3,000.00 | 4,000.00 | |Year 3…show more content…
The Microsurgery Kit project breaks even in the 4th year. a. Explain the rationale behind the discounted payback method. The discounted payback method tells us how long it will take for a project to break even if we include the time value of money. b. Comment on the advantages and shortcomings of this method. By including the time value of money, the discounted payback method indicates that any project with a payback period shorter than its useful life will add value. For this reason, the method could be helpful if the useful life of the project is uncertain. Other than that, the disadvantages are the same as for the simple payback method, and of course the simplicity of the basic method is lost. 3. Compute the net present value (NPV) for each project. BioCom uses a discount rate of 10% for projects of average risk. By summing the discounted cash flows computed in Question 2, we find that the NPV for Nano Test Tubes is $15,064.30 − 11,000 ’ $4,064.30, and for Microsurgery Kit, it is $15,163.15 − $11,000 ’ $4,163.15. a. Explain the rationale behind the NPV
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