Corporate Finance (with Thomson ONE - Business School Edition) (Available Titles Cengagenow)

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86 . (10.4) Crossover rate--nonalgorithmic Answer: d MEDIUM Find the differential cash flows by subtracting B’s cash flows from A’s cash flows for each year. CF 0 = -2,000 CF 1 = -6,000 CF 2 = 1,000 CF 3 = 5,000 CF 4 = 5,000 Enter these cash flows and solve for the IRR/YR = crossover rate = 13.03% .
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87 . (10.4) Crossover rate--nonalgorithmic Answer: c MEDIUM The crossover rate is the point where the two projects will have the same NPV. To find the crossover rate, subtract CF B from CF A : -$100,000 – -$100,000 = 0. $40,000 – $30,000 = $10,000. $25,000 – $15,000 = $10,000. $70,000 – $80,000 = -$10,000. $40,000 – $55,000 = -$15,000. Enter these into your CF register and solve for IRR/YR = 11.21% . 88 . (10.4) Crossover rate--nonalgorithmic Answer: d MEDIUM Find the differential cash flows to compute the crossover rate. Subtracting Project A cash flows from Project B cash flows, we obtain the following differential cash flows: Year B – A Cash Flow 0-$100170240320405-20 Input the cash flows into your calculator‘s cash flow register and solve for IRR/YR to obtain the crossover rate of 9.32% . 89 . (10.6) MIRR (constant cash flows; 3 years) Answer: e MEDIUM WACC: 10.00% Year: 0 1 2 3 Cash flows: -$800 $350 $350 $350 TV = Sum of compounded inflows: Compounded values, FVs: $423.50 $385.00 $350.00 $1,158.50 MIRR = 13.14% Found as discount rate that equates PV of TV to cost, discounted back 3 years @ 10% MIRR = 13.14% Alternative calculation, using Excel's MIRR function 90 . (10.6) MIRR (uneven cash flows; 4 years) Answer: b MEDIUM WACC: 10.00% Year: 0 1 2 3 4 Cash flows: -$900 $300 $320 $340 $360 TV = Sum of comp’ed inflows: Compounded values: $399.30 $387.20 $374.00 $360.00 $1,520.50 MIRR = 14.01% Found as discount rate that equates PV of TV to cost, discounted back 4 years @ 10% MIRR = 14.01% Alternative calculation, using Excel's MIRR function 91 . (10.8) Payback (uneven cash flows; 5 years) Answer: e MEDIUM Year: 0 1 2 3 4 5 Cash flows: -$1,000 $300 $310 $320 $330 $340 Cumulative CF -$1,000 -$700 -$390 -$70 $260 $600 Payback = 3.21 3.21 92 . (10.8) Discounted payback (constant CFs; 3 years) Answer: b MEDIUM WACC: 10.00% Year: 0 1 2 3 Cash flows: -$1,000 $500 $500 $500 PV of CFs -$1,000 $455 $413 $376 Cumulative CF -$1,000 -$545 -$132 $243 Payback = 2.35 2.35
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93 . (10.8) Discounted payback (uneven CFs, 4 years) Answer: d MEDIUM WACC: 10.00% Year: 0 1 2 3 4 Cash flows: -$1,000 $525 $485 $445 $405 PV of CFs -$1,000 $477 $401 $334 $277 Cumulative CF -$1,000 -$523 -$122 $212 $489 Payback = 2.36 2.36 94 . (10.11) Replacement chain--nonalgorithmic Answer: c MEDIUM To find the NPV of the systems we must use the replacement chain approach. TimeSystem ASystem B 0-$100,000-$100,000160,00048,000260,000 – 100,000 = -40,00048,000360,00048,000 – 110,000 = -62,000460,000 – 100,000 = -40,00052,800560,00052,800660,00052,800 Use the CF key to enter the cash flows for each period. I/YR = 11. This should give the following NPVs: NPV A = $6,796.93 NPV B = $31,211.52 Computer B adds the most value, so the correct answer is c. 95 . (10.11) Replacement chain--nonalgorithmic Answer: e MEDIUM The CFs and NPVs (calculated with I/YR = 10.5%) are as follows: TimeProject AProject B 0-$100,000-$50,000140,00030,000240,00030,000340,00030,000 – 55,000 = -25,000440,00032,000540,00032,000640,00032,000NPV$71,687.18 $71,687$41,655.58 $41,656 96 . (10.11) Replacement chain--nonalgorithmic Answer: d MEDIUM Machine A (Time Line in thousands): 0 r = 12% 1 5 6 10 | | | | | -1,000 350 350 375 375 -1,200 -850 With a financial calculator input the following: CF 0 = -1,000,000 CF 1-4 = 350,000 CF 5 = -850,000 CF 6-10 = 375,000 I/YR = 12% Solve for NPV A = $347,802.00.
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Machine B (Time Line in thousands): 0 r = 12% 1 9 10 | | | | -1,500 400 400 400 100 500 CF 0 = -1,500,000 CF 1-9 = 400,000 CF 10 = 500,000 I/YR = 12% Solve for NPV B = $792,286.54 .
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