solnpproblec2 - CARNEGIE MELLON UNIVERSITY Tepper School of...

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CARNEGIE MELLON UNIVERSITYTepper School of BusinessFinanceSummer 2009Practice Problems Topic 2 Solution
2. The following table summarizes the NPV and return of each project.INVESTMENTNPVRETURN1- 10 + 20/1.2 = $6,667(20 - 10)/10 = 1.0 or 100%2- 5 + 12/1.2 = $5,000(12 - 5)/5 = 1.4 or 140%3- 5 + 5.5/1.2 = -$417(5.5 - 5)/5 = 0.10 or 10%4- 2 + 5/1.2 = $2,167(5-2)/2 = 1.5 or 150%(a) Investment 1, because it has the highest NPV.(b) Investment 1, because it maximizes shareholders wealth.3. Calculate NPV of each alternative.

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