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1: Raja Business Machines, has a $30,000 overdue debt with a supplier. Raja is low on cash, with only $8,000 in the checking account and does not want to borrow any more cash. The supplier suggests two options for settling the account:

Option 1: Pay $8,000 now and $24,750, two years from today.

Option 2: Pay $39,500 three years from today.

Assuming that the only factor in the decision is the cost of money (10%), which option should Raja choose?

2: A company has created a strategic plan that requires new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. The company currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are shown. Each investment has a 6-year expected useful life and no salvage value.

Payback Period IRR Investment

A 4.2 10.5 130000

B 5.9 5.1 67000

C 5.0 13.4 83000

D 4.8 7.4 61000

E 3.2 12.1 115000

F 4.0 9.9 65000

G 6.3 9.8 76000

Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. Assume the company had $330,000 available to spend. Which remaining projects should be invested in and in what order?

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