Question 2Wolfe, Inc. is considering two capital investment projects, Q and Z.

Question 2

Wolfe, Inc. is considering two capital investment projects, Q and Z.

Project Q requires an initial outlay of $20 million, while Project Z has initial cash outlay of $25 million. The cost of capital for both projects is 12%. The payback period on each project is 3.5 years. Based on this information:

1. Wolfe should be indifferent between the projects.
2. Wolfe should choose Project Q.
3. Wolfe should choose Project Z.
4. Wolfe should further investigate the cash flows of each project.

Question 3

The Dallas Starts Hockey Club is considering the purchase of a new Zamboni machine. The current Zamboni being used has a book value of zero and a market value of zero, but is in good working order, and will last for at least an additional 10 years. The proposed new Zamboni II machine is anticipated to operate more efficiently, and the Stars engineering staff has estimated that it will produce after-tax cash flows (labour savings and depreciation) of $5,000 per year. The new machine will cost $25,000 delivered, and its economic life is estimated at 10 years.

Principles of Finance (M) Page 10

The University of Adelaide Tutorial Questions Topic 3

Zamboni II’s salvage value will be zero. If the Stars’ cost of capital is 12%, and its marginaltax rate is 40%, should the Dallas Stars buy the new Zamboni machine?

1. NPV = -2,351. Do not buy the new machine.
2. NPV = 3,251. Buy the new machine.
3. NPV = 0. No decision.
4. NPV = 2,351. Buy the machine.

Could u give me a specific process for these two question?

thanks.