Solutions
CHAPTER 9
91
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.
92
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%
93
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
94
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%.
95
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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 Spring '11
 HOLLAND
 Finance, Net Present Value, Calculator solution

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