Exercise E27-7

page 1180
(a) payback period =

expenditure
net cash flow

= $13,000+$2,900+$740
(4x52)x(65-35-10)
= $16,640
$4,160
= 4 years
(b) rate of return =

annual net income

average investment
$4,160 - $3,140
($16,640+940)2

= $1,020
$8,790
= 11.6%

Exercise E27-8
page 1180
(NOTE: This is the textbook solution; averaging the cash flows in not a proper approach. As
explained in lecture and mentioned in most discussion groups, the proper technique for uneven
streams of cash flows is to sum the cash flows each year until the sum is equal to the amount
invested.)

(a) payback period =

expenditure
net cash flow

Project A
$22,000
$31,5003

2.1 years

Project B
$22,000
$28,5003

2.32 years

Project C
$22,000
$33,0003

2.0 years

Exercise E27-8
(continued)
A A
Disc
Year Factor

B B

C C

Cash Present Cash Present Cash Presen

Inflow Value Inflow Value Inflow
t
Value

.86957

7,500

6,522

9,500

8,261

13,000

11,304

.75614

9,000

6,805

9,500

7,183

9,000

6,805

.65752

15,000

9,863

9,500

6,246

11,000

7,233

Total
PV

23,190

21,690

25,343

Inv

22,000

22,000

22,000

1,190

(310)

3,342

Net PV

Exercise E27-9
page 1181
(a)
(1)

(2)

rate of return =

annual net income

average investment

$18,000
($150,0002)

$18,000
$75,000

24%

payback period =

expenditure
net cash flow

$150,000
$48,000

3.125 years

Exercise E27-9
(continued)
Year

PV Factor

Cash Flow

PV of CF

.86957

48,000

41,739

.75614

48,000

36,295

.65752

48,000

31,561

.57175

48,000

27,444

.49718

48,000

23,865

Total

160,904

Investment

150,000

Excess

$10,904

Alternate (since even streams of cash):

Annuity factor
3.35216
Investment
Excess

x
x

NCF
=
$48,000 =
)

PV of all CF
$160,904
150,000
$ 10,904

Brief Exercise BE27-9

page 1178
payback period

expenditure
net cash flow

$400,000
$10,000 + $40,000

8 years

Brief Exercise BE27-10

page 1178
Annuity factor
5.65
Investment
Excess

x
x

NCF
=
$40,000 =
)

PV of all CF
$226,000
225,000
$ 1,000