7211TutAnswersWk10_109

7211TutAnswersWk10_109 - 9-10 NPV and the cost of...

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Unformatted text preview: 9-10 NPV and the cost of capitala.We can use the annuity formula+-=TrrCPV)1(11with r = k= 0.10 and T= 4 for the present value of the future cash flows 46.679,12$)1.1(1110.40004=-=PVNPV = PV Initial cost= $12,679.46 $13,000=-$320.54Reject this project due to its negative NPV.b.To get a positive NPV, kmust be smaller than 10%. Try k=9%.88.958,12$)09.1(1109.40004=-=PVNPV = PV Initial cost= $12,958.88 $13,000= -$41.12Similarly, when k = 8% then NPV = $248.51.Thus 8% is maximum whole-percentage rate cost of capital that would still allow the project to be acceptable. In fact, the IRR (the kthat makes NPV =0) for this project is 8.86%.9.12PV - mutually exclusive projectsa and b.ProjectPV of future cash inflows; NPVA79.771,80$)15.1(1115.180008=-=PVNPV = PV Initial cost= $80,771.79 $85,000=-$4,228RejectBYearCFnk)1(1+PV1$12,0000.870$10,435214,0000.75610,586316,0000.65810,520418,0000.57210,292520,0000.4979,944625,0000.43210,808$62,584.34NPV = $62,584.34 $60,000NPV = $2,584AcceptCYearCFnk)1(1+PV1$50,0000.870$ 43,500230,0000.75622,680320,0000.65813,160420,0000.57211,440520,0000.4979,940630,0000.43212,960740,0000.37615,040850,0000.32716,350$145,043.89NPV = $145,043.89 $130,000NPV = $15,044Acceptc.Ranking - using NPV as criterionRankPressNPV1C$15,0442B2,5843A-4,2289-15 Internal rate of return...
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7211TutAnswersWk10_109 - 9-10 NPV and the cost of...

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