Short Term and Long Term Financial Decisions

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
1
SHORT TERM AND LONG TERM FINANCIAL DECISIONS

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
Contents
Question P-10-2...........................................................................................................................................3
Question P-10-10.........................................................................................................................................4
Question P-10-16.........................................................................................................................................5
Question P-10-22.........................................................................................................................................6
Question 11-3..........................................................................................................................................6
Part A).....................................................................................................................................................6
Part B).....................................................................................................................................................7
Question 11-12........................................................................................................................................7
Question 12-2..........................................................................................................................................7
Question 12-4..........................................................................................................................................9
A)............................................................................................................................................................9
B).............................................................................................................................................................9
C).............................................................................................................................................................9
D)..........................................................................................................................................................10
References.................................................................................................................................................11

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
Question P-10-2
Problem P-10
Years Machine 1 Cumulative cash flows
0 $ (14,000.00) $ (14,000.00)
1 $ 3,000.00 $ (11,000.00)
2 $ 3,000.00 $ (8,000.00)
3 $ 3,000.00 $ (5,000.00)
4 $ 3,000.00 $ (2,000.00)
5 $ 3,000.00 $ 1,000.00
6 $ 3,000.00 $ 4,000.00
7 $ 3,000.00 $ 7,000.00
Payback period 5.67
years
Years Machine 2 Cumulative cash flows
0 $ (21,000.00) $ (21,000.00)
1 $ 4,000.00 $ (17,000.00)
2 $ 4,000.00 $ (13,000.00)
3 $ 4,000.00 $ (9,000.00)
4 $ 4,000.00 $ (5,000.00)
5 $ 4,000.00 $ (1,000.00)
6 $ 4,000.00 $ 3,000.00
7 $ 4,000.00 $ 7,000.00
8 $ 4,000.00 $ 11,000.00
9 $ 4,000.00 $ 15,000.00
10 $ 4,000.00 $ 19,000.00
11 $ 4,000.00 $ 23,000.00
12 $ 4,000.00 $ 27,000.00
13 $ 4,000.00 $ 31,000.00
14 $ 4,000.00 $ 35,000.00
15 $ 4,000.00 $ 39,000.00
16 $ 4,000.00 $ 43,000.00
17 $ 4,000.00 $ 47,000.00
18 $ 4,000.00 $ 51,000.00
19 $ 4,000.00 $ 55,000.00
20 $ 4,000.00 $ 59,000.00
Payback period 6.25
years

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
A)
The payback period is the period that defines the cost of the investment’s time period, a period which is
required to cover the initial costs of the investments. If they are independent projects, the Machine -1
shall be accepted as the project as it would take 5.67 years (Newcomer, Hatry and Wholey, 2015).
B)
Machine 2 shall be accepted.
Question P-10-10
PART A
Years Machine A Discounting factor @15% Present value
0 -85000 1.000 $ (85,000.00)
1 18000 0.870 $ 15,652.17
2 18000 0.756 $ 13,610.59
3 18000 0.658 $ 11,835.29
4 18000 0.572 $ 10,291.56
5 18000 0.497 $ 8,949.18
6 18000 0.432 $ 7,781.90
7 18000 0.376 $ 6,766.87
8 18000 0.327 $ 5,884.23
Net present value $ (4,228.21)
Years Machine B Discounting factor @15% Present value
0 -60000 1.000 $ (60,000.00)
1 12000 0.870 $ 10,434.78
2 14000 0.756 $ 10,586.01
3 16000 0.658 $ 10,520.26
4 18000 0.572 $ 10,291.56
5 20000 0.497 $ 9,943.53
6 25000 0.432 $ 10,808.19
7 0 0.376 $ -
8 0 0.327 $ -
Net present value $ 2,584.34
Years Machine C Discounting factor @15% Present value
0 -130000 1.000 $ (130,000.00)
1 50000 0.870 $ 43,478.26
2 30000 0.756 $ 22,684.31
3 20000 0.658 $ 13,150.32

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
4 20000 0.572 $ 11,435.06
5 20000 0.497 $ 9,943.53
6 30000 0.432 $ 12,969.83
7 40000 0.376 $ 15,037.48
8 50000 0.327 $ 16,345.09
Net present value $ 15,043.89
PART C
RANKING Machine A Machine B Machine C
Net present value $ (4,228.21) $ 2,584.34 $ 15,043.89
Ranking III II I
PART D
Profitability Index Machine A Machine B Machine C
PV of future cash flows $ (4,228.21) $ 2,584.34 $ 15,043.89
Initial investment 85000 60000 130000
RANKING Machine A Machine B Machine C
Profitability Index -0.05 0.04 0.12
Ranking III II I
Question P-10-16
p-10-16
Years Project X
0 -500000
1 100000
2 120000
3 150000
4 190000
5 250000
Internal rate of Return 15.67%
Years Project Y
0 -325000
1 140000
2 120000

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
3 95000
4 70000
5 50000
Internal rate of Return 17.29%
Question P-10-22
Cost of capital 15% 15% 15% 15%
Project A Project B Project C Project D
0 -50000 -100000 -80000 -180000
1 20000 35000 20000 100000
2 20000 50000 40000 80000
3 20000 50000 60000 60000
Net Present value ($4,335.50) $1,117.78 $7,088.02 $6,898.99
Ranking IV III I II
IRR 9.70% 15.63% 19.44% 17.51%
Question 11-3
Part A)
When the assets are treated as replacement or used for the further expansion it can be treated as
the case of the incremental cash flows. In case of the replacement cash flows the incremental
cash flows are calculated whereas in case of the expansion of the business, the cash flow is zero
in case of the other project. Moreover, the suck costs and the other opportunity costs are included
as the cash outflows. The following table gives the proper idea of how it has been calculated (Ng
and Beruvides, 2015).
Replacement Decision Project A Project B Incremental cash flows
0 -4650000 -1550000 -1550000
1 560000 380000 180000
2 925000 380000 545000

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
3 1350000 380000 970000
4 2225000 380000 1845000
5 3400000 380000 3020000
Part B)
In case of the expansion of the business, the cash flows of the other project tend to be zero as can
be seen in the table below.
Expansion decision Project A Project B Cash flows
0 -4650000 0 -4650000
1 560000 0 560000
2 925000 0 925000
3 1350000 0 1350000
4 2225000 0 2225000
5 3400000 0 3400000
Question 11-12
Question 12-2
Cost of the Equipment 690000
Cash flows at 8%
0 55200
1 55200
2 55200
3 55200
4 55200
5 55200
6 55200
7 55200
8 55200
9 55200
10 55200
11 55200
12 55200
13 55200
14 55200
15 55200

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
Cost of the Equipment 690000
Cash flows at 11%
0 75900
1 75900
2 75900
3 75900
4 75900
5 75900
6 75900
7 75900
8 75900
9 75900
10 75900
11 75900
12 75900
13 75900
14 75900
15 75900

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
Question 12-4
A)
The range of the cash flows for the each project has been included as a part of calculation in the
case of calculation of B case.
B)
Project A
Pessimistic 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Annual Cashflows (12,200.00)$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$ 850.00$
Cost of capital @ 9.3% 1.00$ 0.91$ 0.84$ 0.77$ 0.70$ 0.64$ 0.59$ 0.54$ 0.49$ 0.45$ 0.41$ 0.38$ 0.34$ 0.31$ 0.29$ 0.26$
Present value (12,200.00)$ 777.68$ 711.51$ 650.97$ 595.58$ 544.90$ 498.54$ 456.12$ 417.31$ 381.80$ 349.32$ 319.59$ 292.40$ 267.52$ 244.76$ 223.93$
Net Present value (5,468.09)$
Most Likely
Annual Cashflows (12,200.00)$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$
Cost of capital @ 9.3% 1.00$ 0.91$ 0.84$ 0.77$ 0.70$ 0.64$ 0.59$ 0.54$ 0.49$ 0.45$ 0.41$ 0.38$ 0.34$ 0.31$ 0.29$ 0.26$
Present value (12,200.00)$ 1,509.61$ 1,381.16$ 1,263.64$ 1,156.12$ 1,057.75$ 967.75$ 885.41$ 810.07$ 741.14$ 678.08$ 620.39$ 567.60$ 519.30$ 475.12$ 434.69$
Net Present value 867.83$
Optimistic
Annual Cashflows (12,200.00)$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$ 2,450.00$
Cost of capital @ 9.3% 1.00$ 0.91$ 0.84$ 0.77$ 0.70$ 0.64$ 0.59$ 0.54$ 0.49$ 0.45$ 0.41$ 0.38$ 0.34$ 0.31$ 0.29$ 0.26$
Present value (12,200.00)$ 2,241.54$ 2,050.81$ 1,876.31$ 1,716.66$ 1,570.60$ 1,436.96$ 1,314.69$ 1,202.83$ 1,100.49$ 1,006.85$ 921.18$ 842.80$ 771.09$ 705.48$ 645.45$
Net Present value 7,203.75$
Project B
Pessimistic 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Annual Cashflows (12,200.00)$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$ 1,550.00$
Cost of capital @ 9.3% 1.00$ 0.91$ 0.84$ 0.77$ 0.70$ 0.64$ 0.59$ 0.54$ 0.49$ 0.45$ 0.41$ 0.38$ 0.34$ 0.31$ 0.29$ 0.26$
Present value (12,200.00)$ 1,418.12$ 1,297.45$ 1,187.06$ 1,086.05$ 993.64$ 909.10$ 831.75$ 760.98$ 696.23$ 636.99$ 582.79$ 533.20$ 487.83$ 446.32$ 408.35$
Net Present value 75.84$
Most Likely
Annual Cashflows (12,200.00)$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$ 1,650.00$
Cost of capital @ 9.3% 1.00$ 0.91$ 0.84$ 0.77$ 0.70$ 0.64$ 0.59$ 0.54$ 0.49$ 0.45$ 0.41$ 0.38$ 0.34$ 0.31$ 0.29$ 0.26$
Present value (12,200.00)$ 1,509.61$ 1,381.16$ 1,263.64$ 1,156.12$ 1,057.75$ 967.75$ 885.41$ 810.07$ 741.14$ 678.08$ 620.39$ 567.60$ 519.30$ 475.12$ 434.69$
Net Present value 867.83$
Optimistic
Annual Cashflows (12,200.00)$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$ 1,750.00$
Cost of capital @ 9.3% 1.00$ 0.91$ 0.84$ 0.77$ 0.70$ 0.64$ 0.59$ 0.54$ 0.49$ 0.45$ 0.41$ 0.38$ 0.34$ 0.31$ 0.29$ 0.26$
Present value (12,200.00)$ 1,601.10$ 1,464.87$ 1,340.22$ 1,226.19$ 1,121.86$ 1,026.40$ 939.07$ 859.17$ 786.06$ 719.18$ 657.99$ 602.00$ 550.78$ 503.91$ 461.04$
Net Present value 1,659.82$
C)
No, parts A and B do not provide the consistent views on the project as in the case of most likely
the net present value has been same whereas in case of the pessimistic case and the optimistic

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
case the net present value have fluctuated. In case of Project A, (5468.09) whereas in case of
project B the same tends to be positive at 75.84 (DeFusco, et al 2015).
D)
The project B is recommended as the net present value in all the cases is positive with respect to
project B. Further, the net present value is the different between the present values of the cash
inflows as well as cash outflows. This also shows that the potential growth will be scored in case
of the project B.

Running Head: SHORT TERM AND LONG TERM FINANCIAL DECISIONS
References
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Runkle, D.E. and Anson, M.J., 2015. Quantitative
investment analysis. John Wiley & Sons.
Lam, A.P., 2016. Finance-Economic Analysis and Evaluation of Oil and Gas Industry: A Case
Study of X Oil Field in Nam Con Son Basin (Doctoral dissertation).
Newcomer, K.E., Hatry, H.P. and Wholey, J.S., 2015. Cost-effectiveness and cost-benefit
analysis. Handbook of practical program evaluation, p.636.
Ng, E.H. and Beruvides, M.G., 2015. Multiple internal rate of return revisited: frequency of
occurrences. The Engineering Economist, 60(1), pp.75-87.