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 trialanderror, 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%
71