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Exam2_practice1

# Exam2_practice1 - Solutions to Exam 2 Practice Problems...

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Solutions to Exam 2 Practice Problems Part I Question 1 Time 0 (22,000) (50,000) (28,000) 1 6,000 20,000 14,000 2 7,000 15,000 8,000 3 8,000 15,000 7,000 4 9,000 13,000 4,000 5 10,000 13,000 3,000 IRR = 21.6% 17.3% 12.2% NPV @ 10% 7,606.52 8,799.39 14% 4,571.61 3,659.28 23% (711.91) (5,467.06) NPV profile: Conclusions for mutually exclusive projects: At discount rates below 12.2% (the crossover rate or incremental IRR), choose B, because it has a higher NPV. At discount rates between 12.2% and 21.6% (which is A's IRR), choose A, because it has a higher NPV when using discount rates in that range. At discount rates above 21.6%, reject both projects. Above that rate, both projects have negative NPV. Question 2 0 1 2 3 4 5 Project sales 70,000 70,000 70,000 70,000 70,000 Project operating costs (30,000) (30,000) (30,000) (30,000) (30,000) Depreciation (32,000) (32,000) (32,000) (32,000) (32,000) EBIT 8,000 8,000 8,000 8,000 8,000 Tax @ 35% (2,800) (2,800) (2,800) (2,800) (2,800) Add back depreciation
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