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# 11_rev - 111...

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Solutions to End-of-Chapter Problems 11-1 Financial calculator solution:  Input CF 0  = -52125, CF 1-8  = 12000, I/YR = 12, and then solve for NPV  = \$7,486.68. 11-2 Financial calculator solution:  Input CF 0  = -52125, CF 1-8  = 12000, and then solve for IRR = 16%. 11-3 MIRR:  PV costs = \$52,125. FV inflows: PV FV 0 1 2 3 4 5 6 7 8 | | | | | | | | | 12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000 13,440 15,053 16,859 18,882 21,148 23,686   26,528 52,125 MIRR = 13.89% 147,596 Financial calculator solution:  Obtain the FVA by inputting N = 8, I/YR = 12, PV = 0, PMT = 12000,  and then solve for FV = \$147,596.  The MIRR can be obtained by inputting N = 8, PV = -52125,  PMT = 0, FV = 147596, and then solving for I/YR = 13.89%. 11-4 Since the cash flows are a constant \$12,000, calculate the payback period as: \$52,125/\$12,000 =  4.3438, so the payback is about 4 years. 11-5 Project K’s discounted payback period is calculated as follows: Annual Discounted @12% Period Cash Flows      Cash Flows       Cumulative        0 (\$52,125) (\$52,125.00)  (\$52,125.00) 1 12,000 10,714.29  (41,410.71) Chapter 11:  The Basics of Capital Budgeting Integrated Case 1 12% ×  1.12 ×  (1.12) 2 ×  (1.12) 3 ×  (1.12) 4 ×  (1.12) 5 ×  (1.12) 6 ×  (1.12) 7

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2 12,000 9,566.33  (31,844.38) 3 12,000 8,541.36  (23,303.02) 4 12,000 7,626.22  (15,676.80) 5 12,000 6,809.12 (8,867.68) 6 12,000 6,079.57  (2,788.11) 7 12,000 5,428.19 2,640.08 8 12,000 4,846.60 7,486.68 The discounted payback period is 6 +  19 . 8 \$5,42 11 \$2,788.  years, or 6.51 years. 11-6 a. Project A:  Using a financial calculator, enter the following: CF 0  = -25, CF 1  = 5, CF 2  = 10, CF 3  = 17, I/YR = 5; NPV = \$3.52. Change I/YR = 5 to I/YR = 10; NPV = \$0.58. Change I/YR = 10 to I/YR = 15; NPV = -\$1.91. Project B:  Using a financial calculator, enter the following: CF 0  = -20, CF 1  = 10, CF 2  = 9, CF 3  = 6, I/YR = 5; NPV = \$2.87. Change I/YR = 5 to I/YR = 10; NPV = \$1.04. Change I/YR = 10 to I/YR = 15; NPV = -\$0.55. b. Using the data for Project A, enter the cash flows into a financial calculator and solve for IRR A  =  11.10%. The IRR is independent of the WACC, so it doesn’t change when the WACC changes. Using the data for Project B, enter the cash flows into a financial calculator and solve for IRR B  =  13.18%. Again, the IRR is independent of the WACC, so it doesn’t change when the WACC  changes. c. At a WACC = 5%, NPV > NPV B  so choose Project A. At a WACC = 10%, NPV B  > NPV A  so choose Project B. At a WACC = 15%, both NPVs are less than zero, so neither project would be chosen. 11-7 a. Project A: CF 0  = -6000; CF 1-5  = 2000; I/YR = 14. 2 Integrated Case Chapter 11:  The Basics of Capital Budgeting
Solve for NPV A  = \$866.16.  IRR A  = 19.86%. MIRR calculation: 0 1 2 3 4 5 | | | | | | -6,000 2,000 2,000 2,000 2,000 2,000 2,280.00 2,599.20 2,963.09   3,377     .92     13,220     .21     Using a financial calculator, enter N = 5; PV = -6000; PMT = 0; FV = 13220.21; and solve for  MIRR A  = I/YR = 17.12%.

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