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Chapter 13 - HW With Solutions

Chapter 13 - HW With Solutions

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Chapter 13, Solutions
Cornett, Adair, and Nofsinger 
 
13-1
CHAPTER 13 - WEIGHING NET PRESENT VALUE AND OTHER CAPITALBUDGETING CRITERIAQuestions
LG1 1. Is the set of cash flows depicted below normal or non-normal? Explain.
Time
0 1 2 3 4 5
Cash Flow
-$100 -$50 $80 $0 $100 $100
They’re normal: there is only
one change in cash flows from negative to positive.LG1 2. Derive an accept/reject rule for IRR similar to 13-8 that would make the correctdecision on cash flows that are non-normal, but which always have one largepositive cash flow at time zero followed by a series of negative cash flows:
Time
0 1 2 3 4 5
Cash Flow Sign
+ - - - - -With one positive at the beginning and all future cash flows negative, this type of project would be worth more if rates were higher, implying that the NPV profilewould be upward-sloping. So the appropriate accept/reject decision rule would look likeAccept Project if IRR
≤ Cost of Capital
 Reject Project if IRR > Cost of Capital
 
LG1 3. Is it possible for a company to initiate two products that target the same market andare
not 
mutually exclusive?Sure, as long as the market has room for both products.LG2 4. Suppose t
hat your company used “APV”, or “All
-the-Present Value-Except-CF
0
”, toanalyze capital budgeting projects. What would this rule’s benchmark value be?
 
Accept Project if APV ≥
-CF0Reject Project if APV < -CF0LG3 5. Under what circumstances could Payback and Discounted Payback be equal?They would be equal if i = 0.LG5 6.
Could a project’s MIRR ever 
exceed 
its IRR?
 
Chapter 13, Solutions
Cornett, Adair, and Nofsinger 
 
13-2
MIRR would be greater than IRR if a project with normal cash flows had a negativeNPV.LG6 7. If you had two mutually exclusive, normal-cash-flow projects whose NPV profilescrossed at all points, for which range of interest rates would IRR give the rightaccept/reject answer?At all rates, because we would be indifferent between the two projects at any rate.LG7 8. Suppose a company w
anted to double their firm’s value with the next round of 
capital budgeting project decisions. To what would they set the PI benchmark tomake this goal?They would set it equal to 1.LG5 9. Suppose a company faced different borrowing and lending rates: How would thisrange change the way that you would compute the MIRR statistic?We would want to use the borrowing rate to move the negative cash flows to time 0,and the lending rate to move the positive cash flows to the end of the project.
Problems
Basic ProblemsLG2 13-1 Compute the NPV for Project M and accept or reject the project with the cash flowsshown below if the appropriate cost of capital is 8 percent.Project M
Time
0 1 2 3 4 5
Cash Flow
-$1,000 $350 $480 $520 $300 $100Using equation 13-2:
1 2 3 4 5
$350 $480 $520 $300 $100$1,0001.08 1.08 1.08 1.08 1.08$436.96
 NPV 
 
The project should be accepted.
 
Chapter 13, Solutions
Cornett, Adair, and Nofsinger 
 
13-3
LG2 13-3 Compute the NPV statistic for Project U and recommend whether the firm shouldaccept or reject the project with the cash flows shown below if the appropriate costof capital is 10 percent.Project U
Time
0 1 2 3 4 5
Cash Flow
-$1,000 $350 $1,480 -$520 $300 -$100Using equation 13-2:
1 2 3 4 5
$350 $1, 480 $520 $300 $100$1,0001.10 1.10 1.10 1.10 1.10$293.45
 NPV 
 The project should be accepted.LG3 13-5 Compute the Payback statistic for Project B and decide whether the firm shouldaccept or reject the project with the cash flows shown below if the appropriate costof capital is 12 percent and the maximum allowable payback is 3 years.Project B
Time
0 1 2 3 4 5
Cash Flow
-$11,000 $3,350 $4,180 $1,520 $0 $1,000Solving equation 13-3 for N:
Year
0 1 2 3 4 5
Cash Flow
-$11,000 $3,350 $4,180 $1,520 $0 $1,000
Cumulative Cash Flow
-$11,000 -$7,650 -$3,470 -$1,950 -$1,950 -$950This project will never achieve payback, and should be rejected.
LG3 13-6 Compute the Discounted Payback statistic for Project C and recommend whether thefirm should accept or reject the project with the cash flows shown below if theappropriate cost of capital is 8 percent and the maximum allowable discountedpayback is 3 years.Project C
Time
0 1 2 3 4 5
Cash Flow
-$1,000 $350 $480 $520 $300 $100

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