chap007solutions

# chap007solutions - Solutions to Chapter 7 Net Present Value...

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Solutions to Chapter 7 Net Present Value and Other Investment Criteria 15. a.r = 0% NPV = –\$6,750 + \$4,500 + \$18,000 = \$15,750 r = 50% NPV= 250 , 4 \$ 50 . 1 000 , 18 \$ 50 . 1 500 , 4 \$ 750 , 6 \$ 2 = + + - r = 100% NPV= 0 \$ 00 . 2 000 , 18 \$ 00 . 2 500 , 4 \$ 750 , 6 \$ 2 = + + - b. IRR = 100%, the discount rate at which NPV = 0. 16. 09 . 029 , 2 \$ 12 . 1 500 , 8 \$ 12 . 1 500 , 7 \$ 000 , 10 \$ NPV 3 2 = + + - = Since the NPV is positive, the project should be accepted. Alternatively, you can compute the IRR by solving for r, using trial-and-error, in the following equation: = + + + + - 0 ) r 1 ( 500 , 8 \$ r) 1 ( 500 , 7 \$ 000 , 10 \$ 3 2 IRR = 20.61% Since the IRR of the project is greater than the required rate of return of 12%, the project should be accepted. 17. NPV 9% = –\$20,000 + [\$4,000 × annuity factor(9%, 8 periods)] = 28 . 139 , 2 \$ (1.09) 0.09 1 0.09 1 \$4,000 \$20,000 8 = × - × + NPV 14% = –\$20,000 + [\$4,000 × annuity factor(14%, 8 periods)] = 54 . 444 , 1 \$ (1.14) 0.14 1 0.14 1 \$4,000 \$20,000 8 - = × - × + IRR = Discount rate (r) which is the solution to the following equation: 000 , 20 \$ r) (1 r 1 r 1 \$4,000 8 = + × - × r = IRR = 11.81% 7-1

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[Using a financial calculatior, enter: PV = ( - )20,000; PMT = 4000; FV = 0; n = 8, and compute i.] The project will be rejected for any discount rate above this rate. 18. a.The present value of the savings is: \$1,000/r r = 0.08 PV = \$12,500 and NPV = –\$10,000 + \$12,500 = \$2,500 r = 0.10 PV = \$10,000 and NPV = –\$10,000 + \$10,000 = \$0 b. IRR = 0.10 = 10% At this discount rate, NPV = \$0 c.Payback period = 10 years 19. a.NPV for each of the two projects, at various discount rates, is tabulated below. NPV
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## This note was uploaded on 05/09/2008 for the course FNCE 125 taught by Professor Gani,marcel during the Spring '08 term at Santa Clara.

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chap007solutions - Solutions to Chapter 7 Net Present Value...

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