Homework 6 Solutions

# Homework 6 Solutions - Fall 2008 ENG 120 Page 1 of 5...

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Unformatted text preview: Fall 2008 10/18/2008 ENG 120 Page 1 of 5 HOMEWORK #6 SOLUTIONS 1) a- Finding payback periods: Project A: 1000-1000 = 0; payback period is 1 year Project B: 1000-100-200-300-400 = 0; payback period is 4 years Project C: 1000-400-300-200-100 = 0; payback period is 4 years Project D: 1000-500-500 = 0; payback period is 2 years Project E: 1000-400-400 = 200 200/400 = 0.5 payback period is 2.5 years Project F: 1000-500-500 = 0; Payback period is 2 years b- NPV (A) = -1000 + (1000/1.1) = -\$90.9 NPV (B) = 5 4 3 2 1 . 1 500 1 . 1 400 1 . 1 300 1 . 1 200 1 . 1 100 1000 + + + + + − = \$65.3 NPV (C) = 5 4 3 2 1 . 1 500 1 . 1 100 1 . 1 200 1 . 1 300 1 . 1 400 1000 + + + + + − = \$140.6 NPV (D) = ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ + − 3 1 . 1 1 1 . 500 1000 = \$243.4 NPV (E) = ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ + − 5 1 . 1 1 1 . 400 1000 = \$516.31 NPV (F) = 3 2 1 . 1 1000 1 . 1 500 1 . 1 500 1000 + + + − = \$7380.9 c- Project A : shorter payback period is not a good option in this case, since the project looses money, as negative NVP indicates Project B vs. Project C : When we do not take into account of the return, the projects becomes to be the same; they have the same cash inflows, but in different years. Subsequently, they have the same payback periods. However, project C has a greater NVP, bringing greater value....
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Homework 6 Solutions - Fall 2008 ENG 120 Page 1 of 5...

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