128.Procter & Gamble introduced Old Spice High Endurance antiperspirant, targeted to teen-aged boys who
don't watch much TV. P&G did grassroots marketing including handing out samples at skateboarding
114.A restaurant review published in the local newspaper is an example of _.
A. public relations
B. publicity
C. advertising
D. direct marketing
E. personal selling
115.Which of the following is an in
20. Integrated marketing communications is the concept of designing marketing communications programs
that coordinate all promotional activitiesadvertising, personal selling, sales promotion, public r
121.A short-term inducement of value offered to arouse interest in buying a product or service is referred to as
_.
A. customer incentive
B. customer enticement
C. free publicity
D. sales promotion
E.
134.Which of the following is an inherent weakness of direct marketing?
A. high absolute costs
B. declining customer response
C. messages may differ between salespeople
D. difficult to get media coope
PIWi-Fi = $15,000,000 + $10,000,000 / 1.10 + $20,000,000 / 1.102 + $50,000,000 / 1.103
PIWi-Fi = $48,185,574.76
NPV implies we accept the Wi-Fi project since it has the highest NPV. This is the correc
6.
The single biggest difficulty, by far, is coming up with reliable cash flow estimates. Determining an
appropriate discount rate is also not a simple task. These issues are discussed in greater dept
IRR is the discount rate that causes NPV for a series of cash flows to be zero. NPV is preferred
in all situations to IRR; IRR can lead to ambiguous results if there are non-conventional cash
flows, a
CHAPTER 5
NET PRESENT VALUE AND OTHER
INVESTMENT RULES
Answers to Concepts Review and Critical Thinking Questions
1.
Assuming conventional cash flows, a payback period less than the projects life mean
4.
a.
The present value of labor income is the total of the maximum current consumption. So,
solving for the interest rate, we find:
$86 = $40 + $50/(1 + R)
R = .0870 or 8.70%
b.
The NPV of the invest
CHAPTER 4, APPENDIX
NET PRESENT VALUE: FIRST
PRINCIPLES OF FINANCE
Solutions to Questions and Problems
NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple
b.
Enter
30
N
9%
I/Y
10
N
9%
I/Y
Solve for
c.
Enter
PV
$81,437.29
$50,000
PV
PMT
PMT
Solve for
$1,080,483.76
FV
FV
$118,368.18
At 65, she is short: $1,080,483.76 118,368.18 = $962,115.58
Enter
30
N
9%
63. Refundable fee: With the $2,100 application fee, you will need to borrow $202,100 to have
$200,000 after deducting the fee. Solve for the payment under these circumstances.
30 12
N
Enter
6.80% / 1
61.
Enter
9%
EFF
12
C/Y
12
N
8.65% / 12
I/Y
PV
$42,000 / 12
PMT
1
N
9%
I/Y
$43,705.55
PV
PMT
12
N
8.65% / 12
I/Y
PV
$45,000 / 12
PMT
60
N
8.65% / 12
I/Y
NOM
Solve for
Enter
8.65%
Solve for
Enter
Solve
You would be indifferent when the PV of the two cash flows are equal. The present value of the
purchase decision must be $16,594.14. Since the difference in the two cash flows is $38,000
16,594.15 =
Enter
4
N
11%
I/Y
$800
PV
PMT
FV
$1,214.46
3
N
11%
I/Y
$900
PV
PMT
FV
$1,230.87
2
N
11%
I/Y
$900
PV
PMT
FV
$1,108.89
1
N
11%
I/Y
$1,000
PV
PMT
FV
$1,110.00
Solve for
Enter
Solve for
Enter
Solve for
En
13. The statement is incorrect. It is true that if you calculate the future value of all intermediate cash
flows to the end of the project at the required return, then calculate the NPV of this future
Companies can calculate a more precise value using fractional years. To calculate the fractional
payback period, find the fraction of year 2s cash flows that is needed for the company to have
cumulati
For an initial cost of $6,200, the payback period is:
Payback = $6,200 / $970 = 6.39 years
The payback period for an initial cost of $8,000 is a little trickier. Notice that the total cash inflows
aft
12. a.
The profitability index is the PV of the future cash flows divided by the initial investment. The
cash flows for both projects are an annuity, so:
PII = $21,000(PVIFA10%,3 ) / $40,000 = 1.306
P
Since the IRR of the board game is greater than the IRR of the CD-ROM, IRR implies we
choose the board game. Note that this is the choice when evaluating only the IRR of each
project. The IRR decision
CD-ROM:
Cumulative cash flows Year 1 = $1,400
= $1,400
Cumulative cash flows Year 2 = $1,400 + 900 = $2,300
Payback period = 1 + ($1,900 1,400) / $900
Payback period = 1.56 years
Since the board game
Based on the IRR rule, the deepwater fishing project should be chosen because it has the higher
IRR.
b.
To calculate the incremental IRR, we subtract the smaller projects cash flows from the larger
pr
c.
Using the same reason as part b., we would accept the project if the discount rate is 20 percent.
IRR = 14.81%
Discount Rate = 20%
IRR < Discount Rate
Accept the offer when the discount rate is gre
8.
a.
The profitability index is the present value of the future cash flows divided by the initial cost.
So, for Project Alpha, the profitability index is:
PIAlpha = [$800 / 1.10 + $900 / 1.102 + $700
d.
Accept Project B. Since the Projects are mutually exclusive, choose the Project with the highest
PI, while taking into account the scale of the Project. Because Projects A and C have the same
initi
c.
The IRR is the interest rate that makes the NPV of the project equal to zero. So, the IRR of the
AZM is:
0 = $300,000 + $270,000 / (1 + IRR) + $180,000 / (1 + IRR)2 + $150,000 / (1 + IRR)3
Using a
Activity 4
ROE and P/E ratios
The purpose of this assignment is twofold: to give you practice using the DuPont equation to understand
ROE; and (separately) to use company and industry price and earnin
Activity 2 _
Financial Capital
The purpose of this assignment is to help you become familiar with information about the companys
nancial securities on YahoolFinance (th9 :/nance.yahoo.com).
Group Numb
Activity 9
Bond Valuation and YTM
The purpose of this assignment is to practice bond valuation and YTM estimation for annual coupon bonds. You are
also asked to think through the mechanics of interest
Activity 1
Corporate Information
The purpose of this assignment is to help you become familiar with basic company and industry information
(mostly) on YahoolFinance (http:/nanceyahoo.com). Even though