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Nguyen Khanh Son, Chapter 11 and Chapter 7

Nguyen Khanh Son, Chapter 11 and Chapter 7 - Name Nguyen...

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Name : Nguyen Khanh Son Class: Batch 2 Chapter 11 Questions: 11-1 The project classifications used in the capital budgeting process are: Replacement: needed to continue current operations Replacement: cost reduction. Expansion of existing products or markets. Expansion into new products or markets. Safety and/or environmental projects. Other projects. Mergers. 11-7 Because in payback method we can ignore total project return, time value of money, timing of flows after payback period. Problems: 11-7 a) Project A We have: NPV = CF 0 + CF 1 /(1+r) + CF 2 /(1+r) 2 + CF 3 /(1+r) 3 + CF 4 /(1+r) 4 + CF 5 /(1+r) 5 = -6000 + 2000/(1+0.14) + 2000/(1+0.14) 2 + 2000/(1+0.14) 3 + 2000/(1+0.14) 4 + 2000/(1+0.14) 5 = 866.16 Use trial method we will have IRR = 19.85 % Payback period: 2 years Discounted payback Year 1: 2000 / (1+0.14) 1 = 1754.4 Year 2: 2000 / (1+0.14) 2 =1539 Year 3: 2000 / (1+0.14) 3 = 1350 Year 4: 2000 / (1+0.14) 4 = 1184 Year 5: 2000 / (1+0.14) 5 = 1038.7 So, discounted payback A = 4 + 173.6/ 1038.7 = 4.2

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Project B We have: NPV = CF 0 + CF 1 /(1+r) + CF 2 /(1+r) 2 + CF 3 /(1+r) 3 + CF 4 /(1+r) 4 + CF 5 /(1+r) 5 = -18000 + 5600/(1+0.14) + 5600/(1+0.14) 2 + 5600/(1+0.14) 3 + 5600/(1+0.14) 4 + 5600/(1+0.14) 5 = 1,225.25 Use trial method we will have IRR = 16,79 %
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Nguyen Khanh Son, Chapter 11 and Chapter 7 - Name Nguyen...

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