1
FINS 5514
Week 3: NPV & Other Investment Criteria
Solutions
1.a
3
2
1
)
085
.
1
(
900
,
71
$
)
085
.
1
(
500
,
65
$
)
085
.
1
(
600
,
28
$
000
,
135
$
NPV
+
+
+
+
+
+
−
=
; NPV = $3,289.86
2.d
Year
Cash flow
Discounted cash flow
1
$28,600
$26,359.45
2
$65,500
$55,639.32
3
$71,900
$56,291.09
09
.
291
,
56
$
32
.
639
,
55
$
45
.
359
,
26
$
000
,
135
$
2
payback
Discounted
−
−
+
=
= 2.94 years
3.a
IRR = 9.69 percent
The project should be accepted because the IRR of 9.69 percent is greater than the
required return of 8.5 percent.
4.b
PV = $138,289.86
02
.
1
000
,
135
$
86
.
289
,
138
$
PI
=
=
The project should be accepted because the PI of 1.02 is greater than 1.0.
5.
d
percent
89
.
18
1889
.
2
0
$
000
,
800
,
1
$
10
000
,
800
$
000
,
750
$
000
,
480
$
000
,
390
$
000
,
230
$
000
,
50
$
)
4
000
,
250
$
(
AAR
=
=
+
+
+
+
+
+
+
×
−
=
6.
c
Net present value is the most valuable and the average accounting return is the least valuable.
The IRR is better than payback from a financial viewpoint since IRR considers the time value of
money. Also, it is important to note that the projects have conventional cash flows and are
independent.
7.
c
8.
d
9.
b
10. c