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Unformatted text preview: CARNEGIE MELLON UNIVERSITY Tepper School of Business Finance (70391) Summer 2009 Practice Problems Topic 6 Solution CONCEPT QUESTIONS 1. The solution is in the back of Brealey, Myers and Allen. 2. Consider the following projects: Project C C 1 C 2 C 3 C 4 C 5 A1000 +1000 B2000 +1000 +1000 +4000 +1000 +1000 C3000 +1000 +1000 +1000 +1000 (a) If the opportunity cost of capital is 10%, which project has a positive NPV? NPV A = & 1000 + 1000 = (1 + : 1) = & 90 : 91 NPV B = & 2000 + 1000 (1+ : 1) + 1000 (1+ : 1) 2 + 4000 (1+ : 1) 3 + 1000 (1+ : 1) 4 + 1000 (1+ : 1) 5 = +4044 : 73 NPV C = & 3000 + 1000 (1+ : 1) + 1000 (1+ : 1) 2 + 1000 (1+ : 1) 4 + 1000 (1+ : 1) 5 = +39 : 47 (b) Calculate the payback period of each project? Payback A = 1 year Payback B = 2 years Payback C = 4 years (c) Which project(s) would a &rm using the payback rule accept if the cuto/ period were three years? A and B 3. Calculate the IRR (or IRRs) for the following project: C C 1 C 2 C 33000 +3500 +40004000 For what range of discount rates does the project have positive NPV? From the following table, the two IRRs for this project are approximately & 17 : 45% and 45 : 3% . The NPV is positive between these two values....
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 Spring '08
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