SolutionCH9_CH11 - Selected Solution to Chapter 9 : Net...

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Selected Solution to Chapter 9 : Net present value and other investment criteria Q13 NPV versus IRR Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0 -4,000 -4,000 1 2,500 1,500 2 500 2,000 3 1,800 2,600 Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects? Period 0 1 2 3 CF (X) -$4,000 2,500 500 1,800 CF (Y) -$4,000 1,500 2,000 2,600 cash flow 1 cash flow 2 cash flow 3 (1 + r) (1 + r) 2 (1 + r) 3 2,500 500 1,800 (1 + r) (1 + r) 2 (1 + r) 3 1,500 2,000 2,600 (1 + r) (1 + r) 2 (1 + r) 3 r(%) 0 1% 2% 3% 4% 5% 6% NPV (X) 800 705 615 530 448 371 297 NPV (Y) 2,100 1,950 1,807 1,671 1,541 1,418 1,300 r(%) 7% 8% 9% 10% 11% 12% 13% NPV (X) 227 160 96 35 -23 -79 -131 NPV (Y) 1,188 1,081 979 882 789 700 616 r(%) 14% 15% 16% 17% 18% 19% 20% NPV (X) -182 -230 -276 -320 -362 -402 -440 NPV (Y) 535 458 384 313 246 181 120 r(%) 21% 22% 23% 24% 25% 91.73% NPV (X) -476 -511 -544 -576 -607 -1,202 NPV (Y) 61 4 -50 -102 -151 -1,202 NPV = cash flow 0 -$4,000 NPV (Y) = -$4,000 NPV (X) = -1,000 -500 0 500 1,000 1,500 2,000 2,500 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% NPV (X) NPV (Y)
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Selected Solution to Chapter 9 : Net present value and other investment criteria Q17 a. b. c. Q23 PBA = 3 + ($110K/$380K) = 3.29 years; PBB = 2 + ($2K/$10K) = 2.20 years Payback criterion implies accepting project B, because it pays back sooner than project A. A: NPV = – $170K + $10K/1.15 + $25K/1.152 + $25K/1.153 + $380K/1.154 = $91,303.38 B: NPV = – $18K + $10K/1.15 + $6K/1.152 + $10K/1.153 + $8K/1.154 = $6,381.70 NPV criterion implies accept project A because project A has a higher NPV than project B. A: $10K/1.15 + $25K/1.152 + $25K/1.153 = $44,037.15; $380K/1.154 = $217,266.23 Discounted payback = 3 + ($170,000 – 44,037.15)/$217,266.23 = 3.58 years B: $10K/1.15 + $6K/1.152 = $13,232.51; $10K/1.153 = $6,575.16 Discounted payback = 2 + ($18,000 – 13,232.51)/$6,575.16 = 2.73 years Discounted payback criterion implies accepting project B because it pays back sooner than A d. A: $170K = $10K/(1+IRR) + $25K/(1+IRR)2 + $25K/(1+IRR)3 + $380K/(1+IRR)4 IRR = 29.34% B: $18K = $10K/(1+IRR) + $6K/(1+IRR)2 + $10K/(1+IRR)3 + $8K/(1+IRR)4; IRR = 32.01% IRR decision rule implies accept project B because IRR for B is greater than IRR for A. e. A: PI = [$10K/1.15 + $25K/1.152 + $25K/1.153 + $380K/1.154] / $170K = 1.537 B: PI = [$10K/1.15 + $6K/1.152 + $10K/1.153 + $8K/1.154] / $18K = 1.355 Profitability index criterion implies accept project A because its PI is greater than project B’s. f. In this instance, the NPV and PI criterion imply that you should accept project A, while payback period, discounted payback and IRR imply that you should accept project B. The final decision should be based on the NPV since it does not have the ranking problem associated with the other capital budgeting techniques. Therefore, you should accept project A. a. PV of cash inflows = C1/(r – g) = $40,000/(.14 – .07) = $571,428.57 > 0 NPV of the project = –$650,000 + $571,428.57 = –$78,571.43 < 0 so don't start the cemetery business. b. $40,000/(.14 – g) = $650,000; g = 7.85%
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Selected Solution to Chapter 10 : Making caital investment decisions Q15 Year 0 12345 (i) Investment New system -750,000 Reduced NWC 125,000 Salvage of new system 80,000 tax on sale of salvage (35%) 28,000 After-tax sale of salvage 52,000 Net Investment -625,000 160,000 (ii) Operation Saved costs 310,000 310,000 310,000 310,000 310,000 Depreciation 150,000 150,000 150,000 150,000 150,000 EBIT 160,000 160,000 160,000 160,000 160,000 tax (35%) 56,000 56,000 56,000 56,000 56,000 Net Income 104,000 104,000 104,000 104,000 104,000 + plus non-cash expense 150,000 150,000 150,000 150,000 150,000 Operating Cash Flow 254,000 254,000 254,000 254,000 254,000 (iii) Project CF -625,000 254,000 254,000 254,000 254,000 414,000 254,000 254,000 254,000 254,000 414,000 ( 1 + r) ( 1 + r) 2 ( 1 + r) 3 ( 1 + r) 4 ( 1 + r) 5 solve for r (or IRR) which makes the above statement valid IRR or r = 32.8522% (in Excel type formula "=IRR(values,[guess]) NPV = 0 = -625,000 Project Evaluation Your firm is contemplating the purchase of a new $750,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It
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This note was uploaded on 01/31/2011 for the course MBA 1220 taught by Professor Dr.raihan during the Spring '10 term at International Islamic University Malaysia.

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SolutionCH9_CH11 - Selected Solution to Chapter 9 : Net...

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