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Question 1: Evaluating investment projects You are planning to invest $25,000 in new equipment. This investment will generate net cash flows of $15,000 year for the next years. The salvage value after 2 years is zero. The cost of capital is 25% a year. a) Compute the net present value NPV = $ Enter negative numbers with a minus sign, i.e., -100 not ($100) or (100). Should you invest? Why? O YES -- the NPV is negative, which indicates that the investment will reduce costs O YES -- the NPV is positive, which indicates that the investment is profitable NO -- the NPV is negative, which indicates that the investment unprofitable b) Compute the payback period. payback period - years c) Compute the accounting rate of return (ARR). To compute ARR, first compute: annual depreciation=$ annual income average investment=$ ARR = If your answer is 10%, enter 10 without the percent sign. Question 2: Evaluating investment projects You are planning to invest $40,000 in research & development (R&D). This investment will generate cost savings of $28,000 year 1 and $20,000 year 2. After 2 years, the salvage value is zero. The cost of capital is 25% a year. a) Compute the net present value. NPV = $ Should you invest? O YES NO b) Following a government stimulus program, the cost of capital decreased to 10% a year. Compute the net present value at the new cost of capital. NPV = $ Should you invest now? YES ONO

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