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# Finance Capital budgeting : calculation of payback period

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Capital budgeting involves calculation of NPV, IRR, Payback period : If the required return is greater than the coupon rate, a bond will sell at:

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```									              Sub: Finance                                                                     Topic: Capital Budgeting

Question:
Capital budgeting involves calculation of NPV, IRR, and Payback period.
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1. If the required return is greater than the coupon rate, a bond will sell at:

a. Par
b. A discount
d. Book value

2. XYZ Co. is considering the purchase of a new machine. The machine will cost \$250,000 and requires
installation costs of \$25,000. The existing machine can be sold currently for \$25,070. It was purchased
three years ago for \$83,000 and depreciated using MACRS. It can be operated for another four years. Its
market value at that time, if sold, would be \$14,000. The new machine has expected life of five years
and expected to provide operating cash savings of \$88,000 a year for 2 years and \$50,000 a year for the
next two years before depreciation and taxes (EBD&T). After four years the new machine can be sold for
\$12,750. To support the increased business resulting from the purchase of new machine, A/R will
increase by \$12,000; inventory will increase by \$25,000 and current liabilities by \$41,000. The cost of
capital is 17% and the tax rate is 40%.

Determine the Initial Investment (II)
Determine the Payback Period (PP)
Determine the NPV, IRR and MIRR
Make a recommendation to accept or reject the new investment.

3. Recently, Ohio Hospitals filed for bankruptcy. The firm was reorganized as American Hospitals, Inc.,
and the court permitted a new indenture on an outstanding bond issue to be put into effect. The issue
has 10 years to maturity and coupon rate of 10 percent
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