FIN3300 Solution Ch9 (W 0728)

FIN3300 Solution Ch9 (W 0728) - Solution Chapter 9: Net...

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Solution Chapter 9: Net Present Value and Other Investment Criteria Page 293 Questions: 3, 4, 6, 7, 9, 10, 12 3. Project A has cash flows of $19,000 in Year 1, so the cash flows are short by $21,000 of recapturing the initial investment, so the payback for Project A is: Payback = 1 + ($21,000 / $25,000) = 1.84 years Project B has cash flows of: Cash flows = $14,000 + 17,000 + 24,000 = $55,000 during this first three years. The cash flows are still short by $5,000 of recapturing the initial investment, so the payback for Project B is: B: Payback = 3 + ($5,000 / $270,000) = 3.019 years Using the payback criterion and a cutoff of 3 years, accept project A and reject project B. 4. When we use discounted payback, we need to find the value of all cash flows today. The value today of the project cash flows for the first four years is: Value today of Year 1 cash flow = $4,200/1.14 = $3,684.21 Value today of Year 2 cash flow = $5,300/1.14 2 = $4,078.18 Value today of Year 3 cash flow = $6,100/1.14 3 = $4,117.33 Value today of Year 4 cash flow = $7,400/1.14 4 = $4,381.39 To find the discounted payback, we use these values to find the payback period. The discounted first year cash flow is $3,684.21, so the discounted payback for a $7,000 initial cost is: Discounted payback = 1 + ($7,000 – 3,684.21)/$4,078.18 = 1.81 years For an initial cost of $10,000, the discounted payback is: Discounted payback = 2 + ($10,000 – 3,684.21 – 4,078.18)/$4,117.33 = 2.54 years Notice the calculation of discounted payback. We know the payback period is
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This note was uploaded on 05/18/2011 for the course FINANCE Fin3300 taught by Professor Mosley during the Summer '10 term at CSU East Bay.

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FIN3300 Solution Ch9 (W 0728) - Solution Chapter 9: Net...

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