Problem Set 4 Solutions

# Problem Set 4 Solutions - Problem Set 4 Solutions F301 Fall...

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Problem Set 4 Solutions F301 Fall 2010 Question 1 Initial cost 200,000 First cf 21,000 r 0.14 r-g 0.1050 g 0.0350 3.50% Questions 2 - 4 0 1 2 3 Cash flows (300,000) (10,000) 80,000 120,000 Accumulated Sum (10,000) 70,000 190,000 Needed after Year 3 110,000 Fraction of Year 4 needed 0.92 Undiscounted payback period 3.92 years Project would be accepted. Discount rate 12% 0 1 2 3 Cash flows (300,000) (10,000) 80,000 120,000 Present values (8,929) 63,776 85,414 Accumulated Sum (8,929) 54,847 140,261 Still need at Year 5 Discounted payback period Project would be rejected. NPV (15,386) NPV is negative. Project would be rejected. IRR 10.37% This is the rate at which the project just pays off Does not exist . Project does not pay back within five years on a

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at the end of five years on a discounted basis. Question 5 a. b. Question 6 Possible problems with IRR: 1) Some series of cash flows have more than one legitimate 2) IRR does not provide a scale of dollars, so the project wi not always the project with the highest NPV. 3) For some series of cash flows, an IRR does not exist.
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## This note was uploaded on 01/13/2011 for the course BUS A202 taught by Professor Tindall during the Spring '10 term at IUPUI.

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Problem Set 4 Solutions - Problem Set 4 Solutions F301 Fall...

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