BUSI408: CORPORATE FINANCE
Capital Budgeting Practice Problems - Solutions
Instructor: Serdar Aldatmaz
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Chapter 9
17.
a
.
The payback period for each project is:
A:
3 + ($180,000/$390,000) = 3.46 years
(assuming that $390,000 is received uniformly throughout the 4
th
year)
B:
2 + ($9,000/$18,000) = 2.50 years
(assuming that $18,000 is received uniformly throughout the 3
rd
year)
The payback criterion implies accepting project B, because it pays back sooner than project A.
b.
The discounted payback for each project is:
A: $20,000/1.15 + $50,000/1.15
2
+ $50,000/1.15
3
= $88,074.30
$390,000/1.15
4
= $222,983.77
Discounted payback = 3 + ($300,000 – 88,074.30)/$222,983.77 = 3.95 years (uniform CFs)
B:
$19,000/1.15 + $12,000/1.15
2
+ $18,000/1.15
3
= $37,430.76
$10,500/1.15
4
= $6,003.41
Discounted payback = 3 + ($40,000 – 37,430.76)/$6,003.41 = 3.43 years (uniform CFs)
The discounted payback criterion implies accepting project B because it pays back sooner than A.
c
.
The NPV for each project is:
A:
NPV = –$300,000 + $20,000/1.15 + $50,000/1.15
2
+ $50,000/1.15
3
+ $390,000/1.15
4
NPV = $11,058.07
B:
NPV = –$40,000 + $19,000/1.15 + $12,000/1.15
2
+ $18,000/1.15
3
+ $10,500/1.15
4
NPV = $3,434.16
NPV criterion implies we accept project A because project A has a higher NPV than project B.
d.
The IRR for each project is:
A:
$300,000 = $20,000/(1+IRR) + $50,000/(1+IRR)
2
+ $50,000/(1+IRR)
3
+ $390,000/(1+IRR)
4