KP_Ch10WLSolns

# KP_Ch10WLSolns - Created by Babu G Baradwaj Instructor...

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Created by : Babu G. Baradwaj Instructor Manual Created on: October 2, 2007 Chapter 10 For: Kidwell & ParrinoPrinciples of Financial Management Revised EOC # Final CHAPTER 10 1

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Created by : Babu G. Baradwaj Instructor Manual Created on: October 2, 2007 Chapter 10 For: Kidwell & ParrinoPrinciples of Financial Management Revised EOC # Final VIII. Questions and Problems Basic 10.1. Net present value: Riggs Corp. is planning to spend \$650,000 on a new marketing campaign. They believe that this will result in additional cash flows of \$325,000 over the next three years. If the firm uses a discount rate of 17.5 percent, what is the NPV on this project? Solution: Initial investment = \$650,000 Annual cash flows = \$325,000 Length of project = n = 3 years Required rate of return = k = 17.5% Net present value = NPV \$62,337 = + + + - = + + + - = + = = 341 , 200 \$ 401 , 235 \$ 596 , 276 000 , 650 \$ ) 175 . 1 ( 000 , 325 \$ ) 175 . 1 ( 000 , 325 \$ ) 175 . 1 ( 000 , 325 \$ 000 , 650 \$ ) k 1 ( NCF NPV 3 2 1 n 0 t t t 10.2. Net present value: Kingston Inc. is looking to add a new machine at a cost of \$4,133,250. The company expects this equipment will lead to cash flows of \$814,322, \$863,275, \$937,250, \$1,017,112, \$1,212,960, and \$1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? Solution: Cost of new machine = \$4,133,250 Length of project = n = 6 years Required rate of return = k = 15% 2
Created by : Babu G. Baradwaj Instructor Manual Created on: October 2, 2007 Chapter 10 For: Kidwell & ParrinoPrinciples of Financial Management Revised EOC # Final 441,933 \$ - = + + + + + + - = + + + + + + - = + = = 601 , 529 \$ 055 , 603 \$ 537 , 581 \$ 616257 \$ 760 , 652 \$\$ 106 , 708 250 , 133 , 4 \$ ) 15 . 1 ( 000 , 225 , 1 \$ ) 15 . 1 ( 960 , 212 , 1 \$ ) 15 . 1 ( 112 , 017 , 1 \$ ) 15 . 1 ( 250 , 937 \$ ) 15 . 1 ( 275 , 863 \$ ) 15 . 1 ( 322 , 814 \$ 250 , 133 , 4 \$ ) k 1 ( NCF NPV 6 5 4 3 2 1 n 0 t t t 10.3. Net present value: Crescent Industries is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown below. If the firm uses an 18 percent discount rate, should the firm go ahead with the project? Year Cash Flow 0 \$3,300,000 1 \$875,123 2 \$966,222 3 \$1,145,000 4 \$1,250,399 5 \$1,504,445 Solution: Initial investment = \$3,300,000 Length of project = n = 5 years Required rate of return = k = 18% \$134,986 = + + + + + - = + + + + + - = + = = 607 , 657 \$ 942 , 644 \$ 882 , 696 \$ 926 , 693 \$ 630 , 741 \$ 000 , 300 , 3 \$ ) 18 . 1 ( 455 , 504 , 1 \$ ) 18 . 1 ( 399 , 250 , 1 \$ ) 18 . 1 ( 000 , 145 , 1 \$ ) 18 . 1 ( 222 , 966 \$ ) 18 . 1 ( 123 , 875 \$ 000 , 300 , 3 \$ ) k 1 ( NCF NPV 5 4 3 2 1 n 0 t t t Since the NPV is positive, the firm should accept the project. 3

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Created by : Babu G. Baradwaj Instructor Manual Created on: October 2, 2007 Chapter 10 For: Kidwell & ParrinoPrinciples of Financial Management Revised EOC # Final 10.4. Net present value: Franklin Mints, a confectioner, is looking to purchase a new jellybean-making machine at a cost of \$312,500. The company projects that the cash flows from this investment will be \$121,450 for the next seven years. If the appropriate discount rate is 14 percent, what is the NPV for the project? Solution: Initial investment = \$312,500 Annual cash flows = \$121,450 Length of project = n = 7 years Required rate of return = k = 14% \$208,315 = + + + + + + + - = + + + + + + + - = + = = 536 , 48 \$ 331 , 55 \$ 077 , 63 \$ 908 , 71 \$ 975 , 81 \$ 452 , 93 \$ 535 , 106 \$ 500 , 312 \$ ) 14 . 1 ( 450 , 121 \$ ) 14 . 1 ( 450 , 121 \$ ) 14 . 1 ( 450 , 121 \$ ) 14 . 1 ( 450 , 121 \$ ) 14 . 1 ( 450 , 121 \$ ) 14 . 1 ( 450 , 121 \$ ) 14 . 1 ( 450 , 121 \$ 500 , 312 \$ ) k 1 ( NCF NPV 7 6 5 4 3 2 1 n 0 t t t 10.5. Payback: Quebec Inc. is purchasing machinery at a cost of \$3,768,966. The company expects, as a result, cash flows of \$979,225, \$1,158,886, and \$1,881,497 over the next three years. What is the payback period?

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