NPVandOtherInvestmentCriteria

# NPVandOtherInvestmentCriteria - Solutions to Net Present...

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Solutions to Net Present Value and Other Investment Criteria Chapter Homework 14. 70 . 197 \$ ) 12 . 1 ( 000 , 11 \$ 12 . 1 000 , 4 \$ 000 , 5 \$ NPV 2 - = - + = Because the NPV is negative, you should reject the offer. You should reject the offer despite the fact that the IRR exceeds the discount rate. This is a ‘borrowing type’ project with positive cash flows followed by negative cash flows. A high IRR in these cases is not attractive: You don’t want to borrow at a high interest rate. 17. NPV 9% = –\$20,000 + [\$4,000 × annuity factor(9%, 8 periods)] = 28 . 139 , 2 \$ (1.09) 0.09 1 0.09 1 \$4,000 \$20,000 8 = × - × + NPV 14% = –\$20,000 + [\$4,000 × annuity factor(14%, 8 periods)] = 54 . 444 , 1 \$ (1.14) 0.14 1 0.14 1 \$4,000 \$20,000 8 - = × - × + IRR = Discount rate (r) which is the solution to the following equation: 000 , 20 \$ r) (1 r 1 r 1 \$4,000 8 = + × - × r = IRR = 11.81% [Using a financial calculatior, enter: PV = ( - )20,000; PMT = 4000; FV = 0; n = 8, and compute i.] The project will be rejected for any discount rate above this rate. 22. a.

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## This note was uploaded on 10/28/2010 for the course FIN 3300 taught by Professor Jerry during the Winter '10 term at CSU East Bay.

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NPVandOtherInvestmentCriteria - Solutions to Net Present...

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