Answers and solutions 11 24 11 16 a using a financial

Answers and Solutions: 11 - 24

11-16 a. Using a financial calculator, input the following: CF
0
= -190000,
CF
1
= 87000, N
j
= 3, and I = 14 to solve for NPV
190-3
= $11,981.99 ≈
$11,982 (for 3 years).
Adjusted NPV
190-3
= $11,982 + $11,982/(1.14)
3
= $20,070.
Using a financial calculator, input the following: CF
0
= -360000,
CF
1
= 98300, N
j
= 6, and I = 14 to solve for NPV
360-6
= $22,256.02 ≈
$22,256 (for 6 years).
Both new machines have positive NPVs, hence the old machine
should be replaced. Further, since its adjusted NPV is greater,
choose Model 360-6.
11-17 a. NPV of termination after Year t:
NPV
0
= -$22,500 + $22,500 = 0.
Using a financial calculator, input the following: CF
0
= -22500, CF
1
= 23750, and I = 10 to solve for NPV
1
= -$909.09 ≈ -$909.
Using a financial calculator, input the following: CF
0
= -22500, CF
1
= 6250, CF
2
= 20250, and I = 10 to solve for NPV
2
= -$82.64 ≈ -$83.
Using a financial calculator, input the following: CF
0
= -22500, CF
1
= 6250, N
j
= 2, CF
3
= 17250, and I = 10 to solve for NPV
3
= $1,307.29
≈ $1,307.
Using a financial calculator, input the following: CF
0
= -22500, CF
1
= 6250, N
j
= 3, CF
4
= 11250, and I = 10 to solve for NPV
4
= $726.73 ≈
$727.
Using a financial calculator, input the following: CF
0
= -22500, CF
1
= 6250, N
j
= 5, and I = 10 to solve for NPV
5
= $1,192.42 ≈ $1,192.
The firm should operate the truck for 3 years, NPV
3
= $1,307.
b. No. Salvage possibilities could only raise NPV and IRR. The value
of the firm is maximized by terminating the project after Year 3.
Answers and Solutions: 11 - 25

SOLUTION TO SPREADSHEET PROBLEM
11-18 The detailed solution for the problem is available both on the
instructor’s resource CD-ROM (in the file Solution for Ch 11 P18 Build
a Model.xls ) and on the instructor’s side of the web site,
brigham.swcollege.com .
Answers and Solutions: 11 - 26

MINI CASE
YOU HAVE JUST GRADUATED FROM THE MBA PROGRAM OF A LARGE UNIVERSITY, AND ONE
OF YOUR FAVORITE COURSES WAS “TODAY’S ENTREPRENEURS.” IN FACT, YOU ENJOYED
IT SO MUCH YOU HAVE DECIDED YOU WANT TO “BE YOUR OWN BOSS.” WHILE YOU WERE
IN THE MASTER’S PROGRAM, YOUR GRANDFATHER DIED AND LEFT YOU $300,000 TO DO
WITH AS YOU PLEASE. YOU ARE NOT AN INVENTOR AND YOU DO NOT HAVE A TRADE
SKILL THAT YOU CAN MARKET; HOWEVER, YOU HAVE DECIDED THAT YOU WOULD LIKE TO
PURCHASE AT LEAST ONE ESTABLISHED FRANCHISE IN THE FAST FOODS AREA, MAYBE
TWO (IF PROFITABLE). THE PROBLEM IS THAT YOU HAVE NEVER BEEN ONE TO STAY
WITH ANY PROJECT FOR TOO LONG, SO YOU FIGURE THAT YOUR TIME FRAME IS THREE
YEARS. AFTER THREE YEARS YOU WILL SELL OFF YOUR INVESTMENT AND GO ON TO
SOMETHING ELSE.
YOU HAVE NARROWED YOUR SELECTION DOWN TO TWO CHOICES; (1) FRANCHISE L:
LISA’S SOUPS, SALADS, & STUFF AND (2) FRANCHISE S: SAM’S WONDERFUL FRIED
CHICKEN. THE NET CASH FLOWS SHOWN BELOW INCLUDE THE PRICE YOU WOULD RECEIVE
FOR SELLING THE FRANCHISE IN YEAR 3 AND THE FORECAST OF HOW EACH FRANCHISE
WILL DO OVER THE THREE-YEAR PERIOD. FRANCHISE L’S CASH FLOWS WILL START OFF
SLOWLY BUT WILL INCREASE RATHER QUICKLY AS PEOPLE BECOME MORE HEALTH
CONSCIOUS, WHILE FRANCHISE S’S CASH FLOWS WILL START OFF HIGH BUT WILL TRAIL
OFF AS OTHER CHICKEN COMPETITORS ENTER THE MARKETPLACE AND AS PEOPLE BECOME
MORE HEALTH CONSCIOUS AND AVOID FRIED FOODS. FRANCHISE L SERVES BREAKFAST
AND LUNCH, WHILE FRANCHISE S SERVES ONLY DINNER, SO IT IS POSSIBLE FOR YOU
TO INVEST IN BOTH FRANCHISES. YOU SEE THESE FRANCHISES AS PERFECT