2010-07-14_143928_ (2) - 1 a NPVA = $1000 NPVB = $2000...

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1. a. $90.91 .10) (1 $1000 1000 NPV A - = + - = $ $4,044.73 10) (1. $1000 (1.10) $1000 (1.10) $4000 (1.10) $1000 (1.10) $1000 2000 NPV 5 4 3 2 B + = + + + + + - = $ $39.47 10) (1. $1000 .10) (1 $1000 (1.10) $1000 (1.10) $1000 3000 NPV 5 4 2 C + = + + + + - = $ b. Payback A = 1 year Payback B = 2 years Payback C = 4 years c. A and B
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Using the fact that Profitability Index = (Net Present Value/Investment), we see that the Profitability Index for Project 1 = $66 / $300 = 0.22. The remaining calculations are done in the same manner to generate the following table: Project Profitability Index 1 0.22 2 -0.02 3 0.17 4 0.14 5 0.07 6 0.18 7 0.12 Thus, given the budget of $1 million, the best the company can do is to accept Projects 1, 3, 4, and 6. If the company accepted all positive NPV projects, the market value (compared to the market value under the budget limitation) would increase by the NPV of Project 5 plus the NPV of Project 7: $7,000 + $48,000 = $55,000 Thus, the budget limit costs the company $55,000 in terms of its market value.
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The solution is also done on the excel sheet attached. If the $50,000 is expensed at the end of year 1, the value of the tax shield is:
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2010-07-14_143928_ (2) - 1 a NPVA = $1000 NPVB = $2000...

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