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Finance chapter 9 solutions

# Finance chapter 9 solutions - Solutions CHAPTER 9 9-1 1...

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Solutions CHAPTER 9 9-1 6 1 1 (1.10) NPV 90,000 20,000 90,000 20,000(4.35526) 2,894.79 0.10 - =- + =- + =- Calculator solution: CF 0 = -90,000, CF 1 – CF 6 = 20,000, I = 10; compute NPV = -2,894.79 IRR = Calculator solution: CF 0 = -90,000, CF 1 – CF 6 = 20,000; compute IRR = 8.89% Alternative calculator solution using TVM keys: N = 6, PV = -90,000, PMT = 20,000, FV = 0; compute I/Y = 8.89% = IRR The investment is not acceptable. 9-2 5 1 1 (1 IRR) 45,000 15,047 IRR - + = Calculator solution: CF 0 = -45,000, CF 1 – CF 5 = 15,047; compute IRR = 20.0% 9-3 IRR solution: 7 1 1 (1 IRR) 320,000 67,910 IRR - + = Calculator solution: CF 0 = -320,000, CF 1 – CF 7 = 67,910; compute IRR = 11.0% Alternative calculator solution: N = 7, PV = -320,000, PMT = 67,910, FV = 0; compute I = 11.0% Because IRR = 11% < r = 12%, the project is not acceptable. NPV solution: 7 1 1 (1.12) NPV 320,000 67,910 320,000 67,910(4.56376) 10,075.29 0.12 - =- + =- + =- Calculator solution: CF 0 = -320,000, CF 1 – CF 7 = 67,910, I = 12; compute NPV = -10,075.29 Because NPV < 0, the project is not acceptable. 1

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Solutions 9-4 Year Cash Flow Cumulative CF 0 \$(450,000) \$(450,000) 1 120,000 (330,000) 2 120,000 (210,000) 3 120,000 ( 90,000) 4 120,000 30,000 5 120,000 150,000 90,000 PB 3 3.75years 120,000 = + = ; alternative calculation: 450,000 PB 3.75years 120,000 = = Year Cash Flow PV of CF @ 11% Cumulative CF 0 (\$450,000) (\$450,000) (\$450,000) 1 120,000 108,108 (341,892) 2 120,000 97,395 (244,497) 3 120,000 87,743 (156,754) 4 120,000 79,048 (77,707) 5 120,000 71,214 (6,492) DPB > 5 years, which means that the project is not acceptable. At r = 11%, NPV = (\$6,492) and IRR = 10.42%. 9-5 a. PB = \$52,125/\$12,000 = 4.34, so the payback is about 4 years. b. Project L’s discounted payback period is calculated as follows: Annual Discounted @12% Period Cash Flows Cash Flows Cumulative 0 (\$52,125) (\$52,125.00) (\$52,125.00) 1 12,000 10,714.29 ( 41,410.71) 2 12,000 9,566.33 ( 31,844.38) 3 12,000 8,541.36 ( 23,303.02) 4 12,000 7,626.22 ( 15,676.80) 5 12,000 6,809.12 ( 8,867.68) 6 12,000 6,079.57 ( 2,788.11) 7 12,000 5,428.19 2,640.08 8 12,000 4,846.60 7,486.68 years 51 . 6 19 . 428 , 5 \$ 11 . 788 , 2 \$ 6 Payback Discounted = + = c. Numerical solution: 1 8 (1.12) 1 NPV \$52,125 \$12,000 0.12 \$52,125 \$12,000(4.96764) \$7,486.68 - =- + =- + = Financial calculator Solution : Input the appropriate cash flows into the cash flow register, input I = 12, and then solve for NPV = \$7,486.68.
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Finance chapter 9 solutions - Solutions CHAPTER 9 9-1 1...

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