Chapter 9 Check Figures and Complete Solutions

Chapter 9 Check Figures and Complete Solutions - Chapter 9...

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Chapter 9 - SOLUTIONS TO PROBLEMS ASSIGNED Note to students: In problems involving the internal rate of return calculation, a financial calculator has been used. 9-2 Payback Comparisons Standard: 5 years. a. Project 1 Project 2 Year Cash Inflows Investment Balance or Cumulative Cash Flows Year Cash Inflows Investment Balance 0 -$14,000 0 -$21,000 1 $3,000 $3,000 1 $4,000 4,000 2 $3,000 $6,000 2 $4,000 8,000 3 $3,000 $9,000 3 $4,000 12,000 4 $3,000 $12,000 4 $4,000 16,000 5 $3,000 $15,000 5 $4,000 20,000 6 $3,000 $18,000 6 $4,000 24,000 7 $3,000 $21,000 7 $4,000 28,000 Etc… Project 1 Payback occurs in Year 5. Exact payback period equals: = 4 + Amount Yet Needed / Next Year’s CF = 4 + (14,000-12,000) / 3,000 = 4 + 2,000/3,000 = 4.67 years Since this is less than 5 years, this is an acceptable project. However, to make our final decision, we must recognize that this is a choice between two alternatives, so a mutually exclusive investment decision. After looking at Project 2’s payback, we’ll choose the best (if at least one is acceptable). Project 2 Payback occurs in Year 6. Exact payback period equals: = 5 + Amount Yet Needed / Next Year’s CF = 5 + (21,000-20,000) / 4,000 = 5 + 1,000/4,000 = 5.25 years On its own merits, Project 2 is not acceptable since it does not pay back within 5 years.
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b. If independent projects, that is, considered on their own merits, Project 1 is acceptable but Project 2 is not.
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