hw_ch09_1

# hw_ch09_1 - CHAPTER 9 NET PRESENT VALUE AND OTHER...

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NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 2. To calculate the payback period, we need to find the time that the project has recovered its initial investment. The cash flows in this problem are an annuity, so the calculation is simpler. If the initial cost is \$2,400, the payback period is: Payback = 3 + (\$105 / \$765) = 3.14 years There is a shortcut to calculate the future cash flows are an annuity. Just divide the initial cost by the annual cash flow. For the \$2,400 cost, the payback period is: Payback = \$2,400 / \$765 = 3.14 years For an initial cost of \$3,600, the payback period is: Payback = \$3,600 / \$765 = 4.71 years The payback period for an initial cost of \$6,500 is a little trickier. Notice that the total cash inflows after eight years will be: Total cash inflows = 8(\$765) = \$6,120 If the initial cost is \$6,500, the project never pays back. Notice that if you use the shortcut for annuity cash flows, you get: Payback = \$6,500 / \$765 = 8.50 years

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## This note was uploaded on 03/21/2011 for the course FIN 390 taught by Professor Wilson during the Spring '08 term at Metro State.

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hw_ch09_1 - CHAPTER 9 NET PRESENT VALUE AND OTHER...

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