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Chapter11Solutions

# Chapter11Solutions - Chapter 11 Solutions to Problems 11-11...

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Chapter 11 Solutions to Problems 11-11 Project S: Using a financial calculator, enter the following data: CF 0 = -15000; CF 1-5 = 4500; I/YR = 14. NPV S = \$448.86. Project L: Using a financial calculator, enter the following data: CF 0 = -37500; CF 1-5 = 11100; I/YR = 14. NPV L = \$607.20. The decision rule for mutually exclusive projects is to accept the project with the highest positive NPV. In this situation, the firm would accept Project L since NPV L = \$607.20 compared to NPV S = \$448.86. 11-13 Because both projects are the same size you can just calculate each project’s MIRR and choose the project with the higher MIRR. Project X: 0 1 2 3 4 | | | | | -1,000 100 300 400 700.00 448.00 376.32 140 .49 1,000 13.59% = MIRR X 1,664 .81 \$1,000 = \$1,664.81/(1 + MIRR X ) 4 . Project Y: 0 1 2 3 4 | | | | | -1,000 1,000 100 50 50.00 56.00 125.44 1,404 .93 1,000 13.10% = MIRR Y 1,636 .37 \$1,000 = \$1,636.37/(1 + MIRR Y ) 4 . Thus, since MIRR X > MIRR Y , Project X should be chosen. Alternate step: You could calculate the NPVs, see that Project X has the higher NPV, and just calculate MIRR X . NPV X = \$58.02 and NPV Y = \$39.94. 11-15 a. Using a financial calculator, calculate NPVs for each plan (as shown in the table below)  and graph each plan’s NPV profile. Discount Rate NPV Plan A  NPV Plan B             0% \$2,400,000 \$30,000,000 5 1,714,286  14,170,642 12% × 1.12 × (1.12) 2 × (1.12) 3 12% × 1.12 × (1.12) 2 × (1.12) 3

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10 1,090,909   5,878,484 12 857,143   3,685,832 15 521,739   1,144,596 16.7 339,332           0 20 0 -1,773,883 r (%) 5 10 15 20 25 NPV (Millions of Dollars) Plan B Plan A Crossover Rate 16% IRR A = 20% 0 2.4 6 12 18 24 30 IRR B = 16.7% The crossover rate is approximately 16%. If the cost of capital is less than the crossover rate, then Plan B should be accepted; if the cost of capital is greater than the crossover rate, then Plan A is preferred.
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Chapter11Solutions - Chapter 11 Solutions to Problems 11-11...

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