Homework_3_Solutions - 1...

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Unformatted text preview: 1 !"#e%"&k )* +",-ti"0s FIN340 FALL 2006 Professor Gormley, gormley@wustl.edu Distributed: October 10th, 2006 2-e3 4-es567 9ct";e& <=th ?@@A Bi0 c,6ssC D"te3 Please show all work and circle your final answer to make grading easier. Homework Assignments may be done in groups of up to four students and should be submitted jointly. <E F"0si5e& 60 i0Gest#e0t th6t c"sts H<@@@@ 605 Ie0e&6tes the J",,"%i0I i0c&e#e0t6, c6sh J,"%sE 4he "KK"&t-0it7 c"st "J J-05s LiEeE &eM-i&e5 &et-&0N is eM-6, t" <OPE QI0"&i0I t6Res 605 5eK&eci6ti"0 60s%e& the ;e,"% M-esti"0sE Ye6& < H?@@@ Ye6& ? HA@@@ Ye6& * H<@@@@ 6E Th6t is the DUV "J this K&"WectX ! " ! " ! " ! " 3 1 2 2 3 2 3 1 1 1 2000 6000 10000 1.15 1.15 1.15 10000 2,851.15 CF CF CF r r r NPV I NPV NPV # # # $ % # # # $ % # # # $ ;E ysi0I the DUV &-,e sh"-,5 this i0Gest#e0t ;e -05e&t6ke0X Yes, it should be since the NPV > 0. cE ysi0I the ZK67;6ck &-,e[ 605 6 K67;6ck Ke&i"5 "J t%" 7e6&s sh"-,5 this i0Gest#e0t ;e #65eX Under the payback rule, you only undertake a project if the incremental flows generated in the payback period are greater than its initial cost. Since the project only generates $8,000 in the first two years (the payback period), you would not make this investment under the payback rule. 5E \"& %h6t t%" &e6s"0s 5i5 7"-& 60s%e& t" K6&t LcN 5iJJe& J&"# K6&t L;NX Thich &-,e is ;ette&] the DUV &-,e "& K67;6ck &-,eX 2 The payback rule fails to account for all future incremental cash flows and it fails to discount the future cash flows. For these reasons, the NPV rule is better. eE Th6t is the Zi0te&06, &6te "J &et-&0[ "0 this K&"WectX B!i0t3 Q &ec"##e05 7"- -se ^+ _Rce,s Zs",Ge&[ t"", t" 60s%e& this M-esti"0E Qt is ,"c6te5 -05e& the Zt"",s[ #e0-E QJ 7"- 6&e -0J6#i,i6& %ith this t"", se6&ch ^+ _Rce, J"& Zs",Ge&[ 605 &e65 the i0st&-cti"0sE QJ 7"- c60t Ji05 the as",Ge& c"##605 -05e& the Zt"",s[ #e0- c"0s-,t %ith the ^+ _Rce, he,K Ji,e J"& i0st&-cti"0s "0 h"% t" i0st6,, itCE ! " ! " ! " ! " 3 1 2 2 3 2 3 1 1 1 2000 6000 10000 1 1 1 10000 28% CF CF CF r r r IRR IRR IRR NPV I IRR # # # # # # $ % # # # $ % # # # & ?E b#6&t is c"0si5e&i0I 60 -KI&65e t" its eM-iK#e0t th6t %i,, he,K the c"#K607 ;ec"#e #"&e c"st eJJectiGe 605 ;ette& c"#Kete %ith its &iG6,s s-ch 6s T6,#6&tE 4he 0e% eM-iK#e0t %i,, c"st H<O@@@@ t" ;-7 i0st6,,E dss-#e this eM-iK#e0t h6s 6 JiGe 7e6& ,iJe 605 -ses st&6iIht ,i0e 5eK&eci6ti"0 t" e&"E 4he 6Jte&t6R s6,G6Ie G6,-e i0 JiGe 7e6&s %i,, ;e Hg@@@@E b#6&t esti#6tes th6t this 0e% eM-iK#e0t h"%eGe& %i,, s6Ge it Hgg@@@ i0 c"sts e6ch 7e6&E ^"&e"Ge& it %i,, &e5-ce the 0ee5 t" c6&&7 6s #-ch i0Ge0t"&7 6,,"%i0I b#6&t t" c6&&7 H<@@@@ ,ess i0 i0Ge0t"&7 i##e5i6te,7 605 b#6&t %i,, ;e 6;,e t" J-&the& &e5-ce its i0Ge0t"&7 ;7 60 655iti"06, H<@@@ e6ch s-;seM-e0t 7e6&E Q0 7e6& O h"%eGe& b#6&t %i,, 0ee5 t" &et-&0 its i0Ge0t"&7 t" its "&iIi06, ,eGe,s %he0 the eM-iK#e0t is s",5E b#6&ts t6R &6te is *gP 605 its 5isc"-0t &6te is <@PE...
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