4/5/2020

LEARNING OBJECTIVES
Lecture

4 • Understand the capital budgeting process in evaluating investment

proposal, including methods of payback period, net present value,
internal rate of return, profitability index, accounting rate of return,
CAPITAL BUDGETING & INVESTMENT CRITERIA
and economic value added
• Identify the advantage and disadvantage of different investment
Dr. Tien Nguyen
evaluating methods
International University - 2020
• Chapter 8 & 9, Brealey, Myers & Marcus

WHAT IS CAPITAL BUDGETING? CAPITAL BUDGETING DECISIONS

The process of CAPITAL INVESTMENT PROPOSAL • Managers must determine which projects are acceptable and must rank
identifying, analyzing, mutually exclusive projects by order of desirability to the firm.
& selecting • Capital budgeting method
investment projects EVALUATE ALTERNATIVE: • Estimate cash flows
CAPITAL BUDGETING DECISIONS
whose returns (cash • Calculate cost of capital
flows) are expected to • Capital rationing
extend beyond 1 year
POST-COMPLETION AUDIT

DEPENDENCIES
CAPITAL BUDGETING METHODS
01. INDEPENDENT 02. CONTINGENT
Acceptance or rejection Acceptance depends on
 Net Present Value (NPV)
CAPITAL will not influence other acceptance of other
BUDGETING projects  Internal Rate of Return (IRR)
project(s)
DECISION  Payback Period (PP)
 Profitability Index (PI)
03. MUTUAL
EXCLUSIVE
04. CAPITAL
RATIONING
Only one of a number of Fixed amount of total
projects can be accepted funds available limits which
projects may be accepted

1
 4/5/2020

NET PRESENT VALUE (NPV)

CAPITAL BUDGETING METHOD
• The NPV measures the amount by which the value of the firm’s stock
will increase if the project is accepted
NET PRESENT VALUE
(NPV) T
NCFt
NPV  
t 0 (1  rp ) t
where:
NCFt = after-tax cash flow in year t
r p = risk-adjusted discount rate for that investment

NET PRESENT VALUE (NPV) NPV RULE

Microsoft Excel Worksheet
• Work example: Rapid Corp.
• Should Rapid Corp install the new project?
• Assume the require return is 10%
• Accept all projects for which NPV > 0.
required investment • Reject all projects for which NPV < 0.
Year 0 1 2 3 4 5
Net cash flows -$175,000 $44,000 $44,000 $44,000 $44,000 $69,000 • For mutually exclusive projects, choose the project with the
PV -175,000 40,000 36,364 33,058 30,053 42,844
NPV 7,318 highest NPV
T
NCF t
NPV   (1  r t
t0 p)

44 ,000 44 ,000 44 ,000 44 ,000 69,000

NPV  175 ,000     
(1 .10 ) 1 (1.10 ) 2 (1 .10 ) 3 (1.10 ) 4 (1 .10 ) 5

MUTUAL EXCLUSIVE PROJECTS MUTUAL EXCLUSIVE PROJECTS

• Illustration 1: Which project is accepted? • Illustration 1: Which project is accepted?

The government is planning to extend the shipping facilities at Cat Lai. Year 0 1 2 3
• Option 1: building a jetty Jetty (1 million) 0.5m 0.7m 0.8m
• Option 2: building a port (deep enough to accommodate a larger variety Port (3 million) 1.3m 1.3m 1.3m
of vessels)
The environmental considerations require that only one of the options be 0 .5 m 0.7 m 0.8m
NPV Jetty   1m     0.6982 m
undertaken. Assuming a required rate of return of 8% for both projects, 1.08 1.08 2 1.08 3
which one of these mutually exclusive projects would you recommend? →Recommendation:
accept the jetty
1  1 .08  3 
NPV Port   3m  1. 3m    0 .3502 m project
 .08 

2
 4/5/2020

PROBLEM WITH NPV:

PROBLEM WITH NPV COMPARING PROJECT WITH DIFFERENT LIFE

• Must compare project over the same time frame

• C o m p a n y f a c e c a p i ta l r a t i o n i n g ? • So, we compare the ANNUAL EQUIVALENT (AE), or the annual
• H o w t o c h o o se m u t u a l e x c l u si v e annuity with the same NPV
projects w ith different timeline?

COMPARING PROJECT WITH DIFFERENT LIFE COMPARING PROJECT WITH DIFFERENT LIFE

• Illustration 2: … which of two machines should be used …

• Illustration 2: Your firm must decide which of two machines it
should use to produce its output Step 1: calculate the NPV for each project
• Machine A costs $100,000, has a useful life of 4 years, and generates 1  (1 .1)  4 
NPV A   100 ,000  40 ,000    26 ,795
after-tax cash flows of $40,000 per year  0 .1 
• Machine B costs $65,000, has a useful life of 3 years, and generates 1  (1 .1)  3 
NPV B   65 ,000  35 ,000    22 ,040
after-tax cash flows of $35,000 per year  0 .1 
The machine is needed indefinitely and the discount rate is r=10% p.a. Step 2: convert the NPVs for each project into an annual equivalent annuity
26,795 22,040
AEA   $8,453 AE B   $8,863
1  (1.1) 4  1  (1.1) 3 
   
 0.1   0.1 

COMPARING PROJECT WITH DIFFERENT LIFE COMPARING PROJECT WITH DIFFERENT LIFE

• Illustration 1: … which of two machines should be used • The firm is indifferent between the project and the AE annuity:
• Since the project is rolled over forever, the AE annuity lasts
Machine A
0 1 2 3 4 forever.
-100,000 40,000 40,000 40,000 40,000 • The project with the highest AE annuity offers the highest
8,453 8,453 8,453 8,453 aggregate NPV over time.

Machine B BUY • This means:

MACHINE B
0 1 2 3 Aggregate NPVA = $8,453/0.10 = $84,530
-65,000 35,000 35,000 35,000 Aggregate NPVB = $8,863/0.10 = $88,630
8,863 8,863 8,863

3
 4/5/2020

COMPARING PROJECT WITH DIFFERENT LIFE COMPARING PROJECT WITH DIFFERENT LIFE

• Illustration 2: Example 8.3, p. 259

You need a new car. You can either purchase one outright for $15,000 or
lease one for 7 years for $3,000 per year. If you buy the car, it will worth
$500 to you in 7 years. The discount rate is 10%
a) Should you buy or lease?
b) What is the maximum lease payment you would be willing to pay?
• Illustration 3: Example 8.4, p. 260 (when to replace an old machine?)
You are operating an old machine that costs $12,000 per year to operate
and will last 2 more years before it fails. You can replace it now with a
new machine which costs $25,000, initially plus $8,000 per years in
operating costs, and will last for 5 years
a) If the opportunity cost is 6%, should you replace now?

COMPARING PROJECT WITH DIFFERENT LIFE COMPARING PROJECT WITH DIFFERENT LIFE

• Illustration 4: Self-test 8.8, p. 261 • Illustration 4: Self-test 8.8, p. 261

Machine K & L are mutual exclusive and have the following investment and Machine K & L are mutual exclusive and have the following investment and
operating costs. The discount rate is 10%. operating costs. The discount rate is 10%.
a) Which machine is the better buy? a) Which machine is the better buy?
b) Suppose you have an existing machine. You can keep it going for 1 more b) Suppose you have an existing machine. You can keep it going for 1 more
year only, but it will cost $2,500 in repairs and $1,800 in operating costs. year only, but it will cost $2,500 in repairs and $1,800 in operating costs.
Is it worth replacing now with either K or L? Is it worth replacing now with either K or L?

Year 0 1 2 3
K - 10,000 - 1,100 -1,200
L - 12,000 - 1,100 - 1,200 - 1,300

A Decision Tree for Evaluation of Competing

Projects – on a continuing cycle

Yes Select all projects CAPITAL BUDGETING METHOD

Are projects with + NPV
independent?
Mutually exclusive INTERNAL RATE OF RETURN
No
(IRR)
Do projects have
equal lives?
Select project with
better NPV annual No
Yes
equivalent (AE)
Select project with
highest + NPV
23

4
 4/5/2020

INTERNAL RATE OF RETURN (IRR) INTERNAL RATE OF RETURN

• The IRR is the discount rate that makes NPV = 0 • Work example: Rapid Corp.
• Should Rapid Corp install the new project?
• Assume the require return is 10%
T
NCFt
NPV   0 Year 0 1 2 3 4 5
t 0 (1  IRR ) t Net cash flows -$175,000 $44,000 $44,000 $44,000 $44,000 $69,000
IRR 11.52%

IRR RULE: 0

T
NCFt
Accept project if IRR > rp t 0 (1  r p ) t
44,000 44,000 44,000 44,000 69,000
Reject project if IRR < rp 0  175,000     
(1  IRR )1 (1  IRR ) 2 (1  IRR ) 3 (1  IRR ) 4 (1  IRR ) 5
Hurdle Rate IRR  11.52% p.a.  IRR ( B 2 : G 2)

PROBLEM WITH IRR:

PROBLEM WITH IRR BORROWING OR LENDING?

600
NPV at 10%
Project 0 1 IRR
• Borrowing or lending? 400
discount rate
200

• M u l t i p l e I R R ’s Project A
A -1,000 1,500 50% 363.64
NPV

0 Project B
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
B 1,000 -1,500 50% -363.64
• M u t u a l l y e x c l u si v e p r o j e c t s -200

-400

• Scale problem -600

discount rate

… both projects have IRR = 50%

BUT ONLY PROJECT A IS ACCEPTABLE

PROBLEM WITH IRR: PROBLEM WITH IRR:

MULTIPLE RATE OF RETURN THE TIMING PROBLEM
(Unconventional cash flows)
6000

• Considering a firm with the following unconventional

$0.50 5000

$- 4000 0 1 2 IRR NPV

-$0.50
0% 5% 10% 15% 20% 25% 30%
cash flows at a discount rate rp = 15% 3000
Project A -5,000 8,000 0 60% 2,273
NPV

2000
NPV

Project B
-$1.00

-$1.50 Year 0 1 2 1000

-5,000 0 9,800 40% 3,099
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
-$2.00
Cashflow -100 230 -132 -1000

-$2.50 -2000
discount rate
Discount Rate

This project has two IRR’s: one above rp, 230  132 … Despite having a higher IRR,
 100    0
one below r p. Which should be compared 1  IRR 1  IRR 2 PROJECT A IS LESS VALUABLE THAN PROJECT B
with rp? IRR  10 % OR IRR  20 %

5
 4/5/2020

PROBLEM WITH IRR:

THE SCALE PROBLEM Usually, NPV and IRR are consistent with each
other. If IRR says accept the project, NPV will
also say accept the project
Year 0 1 IRR NPV
NPV However, IRR can be in conflict with NPV if
Small project -1 +1.5 50% 0.43 • Investing or Financing Decisions
Large project -100 +110 10% 4.76
vs. • Projects are mutually exclusive
IRR • Projects differ in scale of investment
In this example, we would recommend the ‘small project’ based on IRR, but • Cash flow patterns of projects is different
recommend the ‘large project’ based on NPV (assume 5% required rate of • Cash flow alternate in sign – problem of
return). multiple IRR

… IRR DOES NOT TAKE INTO ACCOUNT PROJECT SCALE (SIZE) If IRR and NPV conflict, use NPV approach

PAYBACK PERIOD METHOD

CAPITAL BUDGETING METHOD

Definition
• The number of years that it takes for a project’s cash inflows to
PAYBACK “pay back” the initial investment
(PP) • Ex: A project that costs $100 to buy and which generates cash
inflows of $50 per year, has a payback period of two years

PAYBACK PERIOD METHOD

PROBLEM WITH PP

• What is the payback for project A & B?

Time A B
• I g n o re s t h e t i m e v a l u e o f m o n e y.
0 (10,000) (10,000)
1 3,500 500 • S o m e ti m es m a n a g e r s c a l c u l a t e
2 3,500 500 Project A: d i s c o u n te d p a y b a ck p e r i o d t o
3 3,500 4,600 Payback in 2.9 yrs s o l ve t h i s p r o b l e m
4 3,500 10,000 • I g n o re s c a s h f l o w s t h a t o c c u r a f t e r
0 1 2 3 4 the payback period
(10,000) 3,500 3,500 3,500 3,500
Cumulative CF -6,500 -3,000 +500

6
 4/5/2020

PROBLEM WITH PP:

IGNORE CASH FLOWS AFTER PP PERIODS
CAPITAL BUDGETING METHOD

Project 0 1 2 3 4
A -100 50 50 50 50 PROFITABILTY INDEX
B -100 50 50 50
(PI)

… Which project should be chosen?

PROFITABILITY INDEX PROFITABILITY INDEX

(Cost – Benefit Ratio) (Cost – Benefit Ratio)

Illustration: In firm only has $350,000 to invest …

Definition
Proj NPV Investment PI
• A project’s PI measures the return of a project relative to cost
A 230,000 200,000 1.15
• It is a variation of NPV method
B 141,250 125,000 1.13
NPV C 194,250 175,000 1.11
PI  D 162,000 150,000 1.08
Initial _ Investment

NPV method suggests us to choose all 4 projects,

Accept if PI > 0 yet the firm does not have enough capital …

PROFITABILITY INDEX
(Cost – Benefit Ratio)
Usually, NPV is consistent PI

Illustration: In firm only has $300,000 to invest …

However, PI can be in conflict with NPV if
Proj NPV Investment PI NPV • Projects are mutually exclusive
A 230,000 200,000 1.15
vs. • Scale of projects differ
B 141,250 125,000 1.13
C 194,250 175,000 1.11 Select projects with PI • Cash flow patterns of projects is
different
highest Weighted Avg PI
D 162,000 150,000 1.08
WAPI (B&D projects) = 1.13(125) + 1.08(150) + 0.0(25)
If PI and NPV conflict, use NPV approach
(300) (300) (300)
= 1.01
WAPI (A project) = 0.77
WAPI (B&C projects) = 1.12

7
 4/5/2020

TUTORIALS
Lecture

• Textbook, Chapter 8: 4
 12, 19, 25, 28, 30, 31, 36, 38
• Textbook, Chapter CAPITAL BUDGETING & INVESTMENT CRITERIA
 9: 2, 3, 9, 14, 16, 20, 22
(cont)
• Tutorial handout Dr. Tien Nguyen
International University - 2020

CAPITAL BUDGETING DECISIONS CASH FLOWS

• Managers must determine which projects are acceptable and must rank
mutually exclusive projects by order of desirability to the firm. • Conventional: initial outflow followed by a series of inflows
• Unconventional: where initial outflow is followed by a mixture of
• Capital budgeting method
inflows and outflows
• Estimate cash flows
• Calculate cost of capital
• Capital rationing

MAJOR CASH FLOWS COMPONENTS RELEVANT CASH FLOWS

• Initial investment (cash outflow at time zero) • The relevant cash flows for evaluating a new investment project are
• Operating cash inflows (incremental after-tax cash inflows during the incremental cash flows contributed by the project
the project’s lifetime)
• Terminal cash flow (after-tax non-operating cash flow in final year): Firm’s cash
Firm’s cash
• Some problems are simplified by assuming the terminal cash Incremental cash flows without
flows
= flows with new -
flow to equal salvage value for the project projects new projects

8
 4/5/2020

Basis Principles for Basis Principles for

Estimating Relevant Cash Flows Estimating Relevant Cash Flows

1. Only Incremental Cash Flows are Relevant
• Include all side effects (project interactions)
• e.g. cannibalization of demand, reduced cost due to volume
discount, ..)
• Forget about sunk costs.
• Include all opportunity costs
• Beware of allocated overhead expenses
• Working capital is fully recovered at the end of the project
2. Discount Cash Flows, Not Accounting Profit
• Depreciation is a non-cash expense that only affects cash flows
through its tax effect
• Therefore, tax depreciation is relevant, not book depreciation (if
they differ)
• Depreciation tax deduction provides a ‘tax shield’
• Assets are depreciated down to their estimated salvage values in
the final year.
• Sales tax, delivery costs, and installation are regarded as part of
the cost of the new asset for depreciation purposes.

Basis Principles 2 –
Illustration

• Illustration 1: Year 0 1 2
• Illustration 1: Company buys a machine for $100,000 EBIDT 53,000 66,000
• 2 year project Depn (50,000) (50,000)
• Machine depreciated straight line over project life Tax @ 36% (1,080) (5,760)
• EBIDT is $53,000 in first year, $66,000 in second year; tax rate is Net Income 1,920 10,240
36% Year 0 1 2
• What is the accounting income, and what are the net cash flows? Operating Cash Flows* 53,000 66,000
Investment (100,000)
Taxes (1,080) (5,760)
Net Cash Flow after tax (100,000) 51,920 60,240
*Assuming EBIDT=Operating cash flows

Basis Principles 2 -
Illustration
Illustration 2:
• What are the net cash flows from disposal, if:
Illustration 2: • Selling price is $40,000
• Company buys a machine for $60,000, useful life 10 years, SL • Gain on sale = 10,000
depreciation • Tax on gain = 10,000 x 30% = 3,000
• NCF from disposal @ year 5: 40,000 – 3,000 = 37,000
• 5 year project. Tax rate 30%
• Selling price is $20,000
• What are the net cash flows for disposal at year 5, if:
• Loss on sale = 10,000
• Selling price is $40,000 • Tax claim = 10,000 x 30% = 3,000
• Selling price is $20,000 • NCF from disposal @ year 5: 20,000 + 3,000 = 23,000
• Selling price is $30,000 • Selling price is $30,000
• No gain or loss
• NCF from disposal @ year 5 = 30,000

9
 4/5/2020

Basis Principles for Basis Principles 3 –

Estimating Relevant Cash Flows Illustration

3. Consistency principle: Interest rate and cash flows must be • Nominal cash flows/nominal interest rate
measured on the same basis 0 1 2 3 4
• Discount real cash flows with a real interest rate.
• Discount nominal cash flows with a nominal interest rate. 10,000 10,000(1.04) 10,000(1.04)2 ...
• Ex:
• Financial leasing @ costs $10,000 per year in 5 year • Real cash flows/real discount rate
• Payment is made at the beginning of each year • Real interest rate = (1+0.08)/(1+0.04) – 1=0.0385
• Nominal interest rate is 8% p.a.
0 1 2 3 4
• Inflation rate is 4% p.a.
10,000 10,000 10,000 10,000 10,000

Basis Principles for WORKED EXAMPLE 1:

Estimating Relevant Cash Flows Rapid Corp.

4. Separate Financing and Investment • Rapid Corp is evaluating the installation of a new machine that
• Project must make sense regardless of how financed costs of $150,000 plus installation costs of $25,000.
• Ignore all financing costs, even if the project is partially • It generates revenues of $150,000 and expenses of $100,000
financed with debt annually.
• Financing side effects will be considered later. • If the machine can be depreciated on a straight-line basis to its
• Interest costs are considered in the discount rate estimated salvage value of $25,000 over its 5-year life.
• The firm’s tax rate is 30%
• What is the relevant cash flows?

WORKED EXAMPLE 2:
Baldwin Co.
Microsoft Excel Worksheet
Microsoft Excel Worksheet

• Worked example: Rapid Corp. • Cost of test marketing: $250,000

• Should Rapid Corp install the new project? • Current market value of proposed factory site: $150,000
• Cost of bowling ball machine: $100,000 (depreciated at 20%, 32%, 19.2%, 11.52%
• Assume the require return is 10%
required investment and 11.52% on machine cost, respectively)
Year 0 1 2 3 4 5 • Initial increase in net working capital: $10,000, changes with sales (10% of sales)
Net cash flows -$175,000 $44,000 $44,000 $44,000 $44,000 $69,000 • Production by year during 5-year life of the machine: 5,000, 8,000, 12,000, 10,000,
PV -175,000 40,000 36,364 33,058 30,053 42,844 6,000 units, respectively
NPV 7,318
• Price @ first year is $20; increases 2% per year thereafter
T
NCF t • Production costs @ first year is $10 per unit; increases 10% per year thereafter
NPV   (1  r t
t0 p) • Annual inflation rate: 5%, nominal discount rate 15%
44 ,000 44 ,000 44 ,000 44 ,000 69,000 • Salvage value $30,000
NPV  175 ,000     
(1 .10 ) 1 (1.10 ) 2 (1 .10 ) 3 (1.10 ) 4 (1 .10 ) 5

10
 4/5/2020

1 2 3 4

Baldwin Co. 1. Initial Investment

Bowling machine
$
$
Year 0
(250,000)
(100,000)
Year 1 Year 2 Year 3 Year 4 Year 5
Baldwin Co.
Opportunity cost (warehouse) ($150,000)

2. Cash flows from operations

Units each year 5000 8000 12000 10000 6000
Sales
Expenses
$
$
100,000
50,000
$
$
163,200
88,000
$
$
249,696
145,200
$
$
212,242
133,100
$
$
129,892
87,846
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Depreciation rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76%
Depreciation
EBT
$
$
20,000
30,000
$
$
32,000
43,200
$
$
19,200
85,296
$
$
11,520
67,622
$
$
11,520
30,526 IO (250,000)
Tax $ 10,200 $ 14,688 $ 29,001 $ 22,991 $ 10,379
Net income
Add back Deprecation
$
$
19,800
20,000
$
$
28,512
32,000
$
$
56,295
19,200
$
$
44,630
11,520
$
$
20,147
11,520 CFO 39,800 60,512 75,495 56,150 31,667
OCF = Net Income + Deprecaition $ 39,800 $ 60,512 $ 75,495 $ 56,150 $ 31,667

3. Working capital WC (10,000) 0 (6,320) (8,650) 3,750 21,220

Working capital Requirement $ (10,000) -10000 -16320 -24970 -21220 0
Change in working capital $ (10,000) $ - $ (6,320) $ (8,650) $ 3,750 $ 21,220
Selling assets 171,758
4. Selling assets $ 171,758
Warehouse $ 150,000
Bowling machine
Selling price $ 30,000
NCFs (260,000) 39,800 54,192 66,845 59,900 224,645
Book value $ 5,760
Capital gain
Tax on capital gain from selling bowling machine
$
$
24,240
8,242
NPV @ 5% 110,098
Cash flows from seeling bowling machine $ 21,758

Net cash flow of the project (NCF) $ (260,000) $ 39,800 $ 54,192 $ 66,845 $ 59,900 $ 224,645
NPV @ 10% 51,590
NPV @ 5%
NPV @ 10%
$
$
110,098
51,590
NPV @ 15% 5,474.21
NPV @ 15% $ (255,239.82)

NCF = Operating Cash Flows - Investment Cost - Change in WC + Asset Sale - Tax on Asset Sale

WORKED EXAMPLE 3:
ABC Optimal Replacement ABC Co.
• Cash Flows if replaced every year
• Should ABC replace its photocopy equipment every year, every second years, or every third year
• Cost of machine is $15,000, using straight-line depr Year 0 1
• The discount rate is 12% p.a. Depreciation (9,000)
• Salvage value is: Maintenance cost (1,000)
• $6,000 at the end of year 1 Effect on taxable income (10,000)
• $3,000 at the end of year 2 Effect on tax paid (tax shield) (3,400)
• $0 at the end of year 3 Year 0 1
• Maintenance costs are: Cost of machine (15,000)
Salvage 6,000
• $1,000 in first year,
Maintenance cost (1,000)
• $2,000 in second year.
Tax benefit (tax shield) 3,400
• $3,000 in third year
Net cash flows (15,000) 8,400
• Corporate tax rate 34%. Assume that company revenues are unaffected by the replacement
PV (7,500)
policy
AE (8,400)

ABC Co. ABC Co.

• Cash Flows if replaced every second year • Cash Flows if replaced every third year
Year 0 1 2 Year 0 1 2 3
Depreciation (6,000) (6,000) Depreciation (5,000) (5,000) (5,000)
Maintenance cost (1,000) (2,000) Maintenance cost (1,000) (2,000) (3,000)
Effect on tax payable (7,000) (8,000) Effect on tax payable (6,000) (7,000) (8,000)
Effect on tax paid (2,380) (2,720) Effect on tax paid (2,040) (2,380) (2,720)
Year 0 1 2 Year 0 1 2 3
Cost of machine (15,000) Cost of machine (15,000)
Salvage 3,000 Salvage 0
Maintenance cost (1,000) (2,000) Maintenance cost (1,000) (2,000) (3,000)
Tax benefit (tax shield) 2,380 2,720 Tax benefit (tax shield) 2,040 2,380 2,720
Net cash flows (15,000) 1,380 3,720 Net cash flows (15,000) 1,040 380 (280)
PV (10,802) PV (13,968)
AE (6,392) AE (5,815)

11
 4/5/2020

TUTORIALS
ABC Co.
• Recommendation:

Year 1 2 3 • Textbook, Chapter 8:

NPV (7,500) (10,802) (13,968)  12, 19, 25, 28, 30, 31, 36, 38
AE (8,400) (6,392) (5,815) • Textbook, Chapter
 9: 2, 3, 9, 14, 16, 20, 22
• Tutorial handout
 Replace every third year!

12