Fin 302 Hw 1 - k= 0.1 CF 0 1 2 3 4 Idea 2 Period Payback(1,000,000 500000 400000 300000 100000 CF 0 1 2 3 4 b Rate 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07

Fin 302 Hw 1 - k= 0.1 CF 0 1 2 3 4 Idea 2 Period...

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k = 0.1 a. Idea 1 Period CF Payback PV of CF FV of CF 0 (1,000,000) -1,000,000 1 500000 (500,000) 454,545 665500 2 400000 (100,000) 330,579 484000 3 300000 200,000 225,394 330000 4 100000 300,000 68,301 100000 2.3333333 78,820 1579500 NPV = $78,820 IRR = 14.49% Rate = 12.11% MIRR = 12.11% Idea 2 Period CF Payback PV of CF FV of CF 0 (1,000,000) -1,000,000 1 100000 (900,000) 90,909 133100 2 300000 (600,000) 247,934 363000 3 400000 (200,000) 300,526 440000 4 600000 400,000 409,808 600000 3.3333333 49,177 1536100 NPV = $49,177 IRR = 11.79% Rate = 11.33% MIRR = 11.33% b. Rate Idea 1 NPV Idea 2 NPV 0 300,000 400,000 0.01 274,443 357,923 0.02 249,745 317,626 0.03 225,866 279,015 0.04 202,771 242,002 0.05 180,424 206,503 0.06 158,792 172,442 0.07 137,844 139,746 0.08 117,551 108,345 0.09 97,885 78,176 0.1 78,820 49,177 0.11 60,330 21,292 0.12 42,392 (5,533) 0.13 24,983 (31,349) 0.14 8,083 (56,204) 0.15 (8,330) (80,142) 0.16 (24,274) (103,207) 0.17 (39,768) (125,438) 0.18 (54,829) (146,873) 0.19 (69,474) (167,549) 0.2 (83,719) (187,500) 0.21 (97,579) (206,757) 0.22 (111,067) (225,352) 0.23 (124,198) (243,312) 0.24 (136,985) (260,667) 0.25 (149,440) (277,440) c. d. e. At a 10% discount rate, I would choose idea 1 simply because the NPV is greater than the NPV for idea 2. At a 25% discout rate, I would choose neither idea because both ideas result in a negative NPV. However, if I had to choose one or the other, I would select idea 1 since the NPV is greater than the NPV of idea 2. At a 3% discout rate, I would choose idea 2 because the NPV is greater than that of idea 1. The answers change for different required rates of return because of the steepness of the slopes of the NPV profiles. For instance, idea 2 is more sensitive to changes in the rate than idea 1.
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