4f.

The estimation of the projects rate of return using paybacks reciprocal is

more appropriate with very long lives.
The payback reciprocal is computed by dividing the digit "1" by a project's
payback period expressed in years.
Payback Reciprocal =

1
Payback period

Annual cas h flow

Total investment

Payback reciprocal is exactly equal to the unadjusted rate of return.

Unadjusted rate means a rate which has not been adjusted by taking into
account the time value of money. It is useful where the cash flows is
relatively consistent and the life of the asset is at least double the payback
period.
8. Investment tax credit (ITC) is an amount that business are allowed by law
to deduct from their taxes.
n

cas h flow
Net(1+
k)t

NPV =

t =1

Initial cost

AT cost saving
DepreciationTax Saving+
t
(1+k )

Saving
DepreciationTax
t
(1+k )

t =1

t =1

- Initial cost

cost saving
AT(1+k
)t
t =1

- Initial cost

NPV (A-ITC) NPV (B-ITC)

n

t =1

DepreciationTax Saving ( AITC )Depreciation Tax Saving( BITC )

(1+k )t

212500(0.1)
n

t =1

212500(0.1) x Depreciationratet x Taxrate

(1+ k)t

+ 212500(0.1) > 0

-> NPV (A-ITC) > NPV (B-ITC)

NPV increases so the acceptability of the project is higher.
2. Net present value of a project or a company is the difference between
the present value of cash inflows and the present value of cash outflows. NPV

is used in capital budgeting to analyze the profitability of an investment or

project.
The following is the formula for calculating NPV:

where:
Ct = net cash inflow during the period
Co= initial investment
r = discount rate, and
t = number of time periods
Economic rationale behind the NPV
NPV primarily seeks to identify the most viable investment opportunities by
comparing the present value of future cash flows of projects. The rationale
behind the NPV method is its focus on the maximization of wealth for
business owners or shareholders.

NPV is affected by 4 factors as in the formula

- Cash flow of the project -> CF of each company is different: depreciation
expenses of machines are different, tax rate for companies are not the same
etc.
- Initial investment -> Not sure other Chicagos customer would invest how
much, whether it is equal to Lone Stars.
- Discount rate might be the same in one time period
- Time period are the same if investment time of them are equal.