Solutions to Lab Problems for Chapter 13

Solutions to Lab - Solutions to Lab Problems for Chapter 13 18. Section: 13.4 Capital Rationing Learning Objective: 13.4

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Unformatted text preview: Solutions to Lab Problems for Chapter 13 18. Section: 13.4 Capital Rationing Learning Objective: 13.4 Difficulty: Easy Solution: a. Project D – life = 5 years, NPV (using discount rate of 7% given earlier) = $116.58. Project G – life = 3 years, NPV = $  ­305.12 Since the NPV of project G is negative, there is no point in proceeding, but the solution is given below anyway. Annual cash flows Project Project D G Initial  ­$5,000  ­3,000 investment Year 1 4,800 1,500 Year 2 1,000 1,200 Year 3 6,000 300 Year 4  ­3,000 Year 5  ­4,000 The chain replication will require repeating Project D three times and Project G five times. Project D: Project G: The NPV of project D is greater than G, so we would choose D. b. Project D – life = 5 years, NPV (using discount rate of 7% given earlier) = $116.58. Project G – life = 3 years, NPV = $ ­305.12 Project D: find the annuity of 5 years that has the same PV as the project. N= 5, PV = 116.58, I=7%, solve for PMT. Annuity = $28.43 Project G: N=3, PV =  ­305.12, I=7%, solve for PMT. Annuity =  ­$116.27 Choose project D as it has the higher equivalent annual NPV. 1 28. Section: 13.2 Evaluating Investment Alternatives Learning Objective: 13.2 Difficulty: Medium Solution: The crossover rate is the discount rate that makes the NPVs of both projects the same. We can write it in this way to mirror a single project’s cash flows: Using a financial calculator (TI BA II Plus): [CF][2nd][CLR WORK] –3,000 [Enter][↓] 2,000 [Enter][↓] [↓] 1,000 [Enter][↓] [↓] 600 [Enter][↓] [↓] [IRR] [CPT] gives 12.24%. If you use 12.24% to calculate NPVs of both projects, you will get the same NPV of $522.48. 46. Section: 13.2 Evaluating Investment Alternatives Learning Objective: 13.2 Difficulty: Difficult Solution: Using a financial calculator (TI BA II Plus): [CF][2nd][CLR WORK] –66,777 [Enter][↓] 20,000 [Enter][↓] 6 [Enter][↓] 40,000 [Enter][↓] [↓] [NPV][18][Enter] [↓] [CPT] gives $15,732.05 Since NPV > 0, we should accept the project. Using a financial calculator (TI BA II Plus): [CF][2nd][CLR WORK] –66,777 [Enter][↓] 20,000 [Enter][↓] 6 [Enter][↓] 40,000 [Enter][↓] [↓] 2 [IRR][CPT] gives 25.35%. Since IRR > k, we should accept the project. Therefore, NPV and IRR yield the same decision. 3 ...
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This note was uploaded on 01/10/2012 for the course TEFLER 2350 taught by Professor Rentz during the Winter '11 term at University of Ottawa.

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