hw_ch09_2 - CHAPTER 9 NET PRESENT VALUE AND OTHER...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 9 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 13. The IRR is the interest rate that makes the NPV of the project equal to zero. The equation to calculate the IRR of Project X is: 0 = –$15,000 + $8,150/(1+IRR) + $5,050/(1+IRR) 2 + $6,800/(1+IRR) 3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 16.57% For Project Y, the equation to find the IRR is: 0 = –$15,000 + $7,700/(1+IRR) + $5,150/(1+IRR) 2 + $7,250/(1+IRR) 3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 16.45% To find the crossover rate, we subtract the cash flows from one project from the cash flows of the other project, and find the IRR of the differential cash flows. We will subtract the cash flows from Project Y from the cash flows from Project X. It is irrelevant which cash flows we subtract from the other. Subtracting the cash flows, the equation to calculate the IRR for these differential cash flows is: Crossover rate: 0 = $450/(1+R) – $100/(1+R) 2 – $450/(1+R) 3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: R = 11.73% The table below shows the NPV of each project for different required returns. Notice that Project Y always has a higher NPV for discount rates below 11.73 percent, and always has a lower NPV for discount rates above 11.73 percent. R
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 4

hw_ch09_2 - CHAPTER 9 NET PRESENT VALUE AND OTHER...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online