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tut3solss - FINS 5514 Week 3 NPV Other Investment Criteria...

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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
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