# SOLUTIONS TO END-OF-CHAPTER PROBLEMS

12-1 NPV = -\$52,125 + \$12,000[(1/I)-(1/(I*(1+I)N)] = -\$52,125 + \$12,000[(1/0.12)-(1/(0.12*(1+0.12)8)] = \$7,486.68. Financial calculator: Input the appropriate cash flows into the cash flow register, input I = 12, and then solve for NPV = \$7,486.68. 12-2 12-3 Financial calculator: Input the appropriate cash flows into the cash flow register and then solve for IRR = 16%. MIRR: PV Costs = \$52,125. FV Inflows: PV 012%
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12,000 12,000 12,000 12,000 12,000 12,000 12,000 13,440 15,053 16,859 18,882 21,148 23,686 26,528 MIRR = 13.89% 147,596

Financial calculator: Obtain the FVA by inputting N = 8, I/YR = 12, PV = 0, PMT = 12000, and then solve for FV = \$147,596. The MIRR can be obtained by inputting N = 8, PV = -52125, PMT = 0, FV = 147596, and then solving for I = 13.89%. 12-4 PV = \$12,000[(1/I)-(1/(I*(1+I)N)] = \$12,000[(1/0.12)-(1/(0.12*(1+0.12)8)] = \$59,611.68. Financial calculator: Find present value of future cash flows by inputting N = 8, I/YR = 12, PMT = -12000, FV = 0, then solve for PV = \$59,611.68. PI = PV of future cash flows / Initial cost = \$59,611.68/\$52,125 = 1.14.

39) (23.410.68 The discounted payback period is 6 + \$5.12-5 Year 0 1 2 3 4 5 6 7 8 CF -52.000 12.36 \$7.19 years.11) 2.875 The cumulative cash flows turns positive in Year 5.428.428.125 12.626.34.69) (2.11 Cumulative Discounted CF -52.846.00 (41.676. Because the future cash flows are identical.02) (15.000 12.566.60 \$2.33 \$8.125 -40.844.875 31.714.71) (31.000 12.22 \$6.000 12.541.079.51 years.788.640.125 -28.000 12.000 12.125/\$12.125 7.000 12.000 12.000 Cumulative CF -52.08 7.867.29 \$9.19 \$4.000 12.57 \$5. we can also find the payback period by dividing the cost by the cash flow: \$52. enter the following: CF0 = -15000000 CF1 = 5000000 CF2 = 10000000 CF3 = 20000000 .000 12.000 12.486.000) = 4.81) (8.000 12. 12-7 Project A: Using a financial calculator.12 \$6.000 12.303.000 12.875 19.125.125 -4.875 43.809.125 12. 12-6 The project’s discounted payback period is calculated as follows: Year 0 1 2 3 4 5 6 7 8 Annual CF -52.788.000 Discounted CF (@12%) \$10.125 -16.125/\$12. or 6.34. so the payback will be 4 plus the part of Year 5 that is required to return the investment: Payback = 4 + (\$4.000 = 4.

100 5.100 + \$17.587. NPV = \$10.100(PVIFA14%. NPV = \$12.838.712 .170.628 7.99% ≈ 15%. 12-8 Truck: NPV = -\$17.300.897.939.952.954.108. NPV = \$16.100 + \$5.059. MIRR: PV Costs = \$17. FV Inflows: PV 0 14% | 1 | 2 | 3 | 4 | FV 5 | 5.100(3. and then solve for NPV = \$409.4331) = -\$17.54% (Accept) 5.509 = \$409.556 8.814 6. Change I/YR = 10 to I/YR = 5. NPV = \$15. NPV = \$13. Change I/YR = 5 to I/YR = 15. input I/YR = 14. Project B: Using a financial calculator. enter the following: CF0 = -15000000 CF1 = 20000000 CF2 = 10000000 CF3 = 6000000 I/YR = 10. (Accept) Financial calculator: Input the appropriate cash flows into the cash flow register.836.I/YR= 10.100 5. Financial calculator: Input the appropriate cash flows into the cash flow register and then solve for IRR = 14.100. Change I/YR = 5 to I/YR = 15.100 5.213. Change I/YR = 10 to I/YR = 5.100 5.100 + \$5.614 33.5) = -\$17. NPV = \$18.100 17.100 MIRR = 14.

576 Financial calculator: Obtain the FVA by inputting N = 5.430. and then solving for I/YR = 14. and then solve for NPV = \$3.19%.54%.667 49. Pulley: NPV = -\$22. and then solve for FV = \$49.4331) = -\$22. FV = 49576.712. I/YR = 14. and then solve for FV = \$33. MIRR: PV Costs = \$22. The MIRR can be obtained by inputting N = 5. PMT = 7500.430 MIRR = 17. PV = -17100.500 7. FV = 33712.500 7. (Accept) Financial calculator: Input the appropriate cash flows into the cash flow register.500 7.747 11. PV = -22430.19% (Accept) 7.Financial calculator: Obtain the FVA by inputting N = 5. PMT = 5100. PMT = 0. FV Inflows: PV 0 14% | 1 | 2 | 3 | 4 | FV 5 | 7.318.748 = \$3.112 12. .500 8. I/YR = 14.550 9. PV = 0. PMT = 0. Financial calculator: Input the appropriate cash flows into the cash flow register and then solve for IRR = 20%.500(3.430 + \$25.500 22. The MIRR can be obtained by inputting N = 5.430 + \$7. and then solving for I/YR = 17.318. input I/YR = 14. PV = 0.576.

000 [(1/0.12)6)] = -\$22.500 + \$5.12)-(1/(0. Financial calculator: Input the appropriate cash flows into the cash flow register and then solve for IRR = 17.500 + \$20.1114) = -\$22.12*(1+0.97% ≈ 18%.290(4.557 = \$3. Gas-powered: NPVG = -\$17. Financial calculator: Input the appropriate cash flows into the cash flow register and then solve for IRR = 18%.1114) = -\$17.000 + \$25.500 + \$5.290 [(1/i)-(1/(i*(1+i)n)] = -\$22. input I/YR = 12.861.12)6)] = -\$17.861.000 + \$6.861 = \$3. .000 + \$6.000 [(1/i)-(1/(i*(1+i)n)] = -\$17. The company gets a high rate of return (18% > r = 12%) on a larger investment.000 + \$6.12)-(1/(0. Financial calculator: Input the appropriate cash flows into the cash flow register.057.500 + \$5. The firm should purchase the electric-powered forklift because it has a higher NPV than the gas-powered forklift. Financial calculator: Input the appropriate cash flows into the cash flow register. and then solve for NPV = \$3.000(4. and then solve for NPV = \$3.290 [(1/0.12*(1+0.057.12-9 Electric-powered: NPVE = -\$22. input I/YR = 12.

Financial calculator solution.058.814.77%. Nj = 5. CF1 = 3000. Inputs 5 N I = -19.000. IRRS = ? IRRS = 15.34 NPVL = \$26.54.675.000 = \$814.814.34.77 MIRRS = 13. Project L Inputs 5 N 12 I PV 7400 PMT 0 FV Output = -26.33 .34 .000 = \$1.675. CF1 = 7400.54 FV Output = 13.12-10 Financial calculator solution.\$25. Input CF0 = -25000.54 -10000 PV 0 PMT 19058. IRR: Input CF0 = -10000. . MIRR: Project S Inputs 5 N 12 I 0 PV 3000 PMT FV Output PV costsS = \$10.058.33.24%. Nj = 5. Financial calculator solution.675.33 NPVS = \$10.67%. FV inflowsS = \$19. NPV: Project S Inputs 5 N 12 I PV 3000 PMT 0 FV Output = -10. IRRL = ? IRRL = 14.\$10.

MIRRS > MIRRL.814. and hence L should be chosen.000 \$25.000. . and PIS > PIL.33 \$26. Inputs 5 N I -25000 PV 0 PMT 47011. MIRR.46%. PIS = \$10.34 = 1. The scale difference between Projects S and L result in the IRR.07. NPVL > NPVS.07 FV Output = 13.07 PV costsL = \$25.000 Thus. PI = 1. However. IRRS > IRRL.675. L = \$10.067.Project L Inputs 5 N 12 I 0 PV 7400 PMT FV Output = -47.46 MIRRL = 13.011. NPV favors Project L. FV inflowsL = \$47. and PI favoring S over L.081.011.

00 376.37/(1 + MIRRY)4. CF1-5 = 350000. the project should be undertaken because its NPV is positive and its IRR is greater than the firm's cost of capital. since MIRRX > MIRRY. I = 14.00 448.404.000 CF0 = -1065000.00 56. IRR = 19.000 = \$1.000 100 50 50.664. 12-12 a.94. NPV = ? NPV = \$136. see that Project X has the higher NPV.02 and NPVY = \$39.636.00 125.664.49 1.32 140. c. Project Y: 0 12% | -1.000 1 | 2 | 3 | 4 | 1.12-11 Project X: 0 12% | 1 | 2 | 3 | 4 | -1.636.59% = MIRRX` \$1. . and just calculate MIRRX.10% = MIRRY \$1. b.81/(1 + MIRRX)4.000 100 300 400 700. Purchase price Installation Initial outlay \$ 900. Ignoring environmental concerns.000 \$1. NPVX = \$58. These outflows could be so large as to cause the project to have a negative NPV--in which case the project should not be undertaken. Alternative step: You could calculate NPVs.000 165.81 1.37 1. Project X should be chosen.065.000 = \$1.44 1.93 1.000 13.578.22%. Thus.000 13. Environmental effects could be added by estimating penalties or any other cash outflows that might be imposed on the firm to help return the land to its previous state (if possible).

NPV (\$) 1.1 20.000 900 800 700 600 500 400 300 200 100 Project A Project B Cost of Capital (%) 5 10 15 20 25 30 -100 -200 -300 r 0. IRRB = 24.0 18.0 NPVA \$890 283 200 0 (49) (138) (238) NPVB \$399 179 146 62 41 0 (51) b.0 30.12-13 a.0 24.0 12.1%. IRRA = 18. .0%.0% 10.

As long as the cost of capital is greater than the crossover rate.91%.60(1+MIRR)7. specifically \$283. both the NPV and IRR methods will lead to the same project selection.459. d. Now. thus. Thus. only one of the projects can be chosen.10)3 + \$600(1. an HP can be "tricked" into giving the roots. construct a Project ∆ which is the difference in the two projects' cash flows: Project ∆ = Year CFA . At r = 17%.10)1 = \$2.57%.60 in 7 years to equal \$978. MIRR is that discount rate which forces the TV of \$2. TV inflows = \$600(1. However.89%. At r = 10%.05.10)3 + \$180/(1. Similarly.10)2 + \$850(1. e. After you have keyed Project Delta's cash .60.60. Here is the MIRR for Project A when r = 10%: PV costs = \$300 + \$387/(1. Thus.82. One could use the trial and error method of entering different discount rates until NPV = \$0. Project A has the greater NPV.07%.CFB 0 \$105 1 (521) 2 (327) 3 (234) 4 466 5 466 6 716 7 (180) IRR∆ = Crossover rate = 14.547.82: \$952. a calculator's IRR function will not work.00 = \$2. Projects A and B are mutually exclusive.95 which is higher than Project A's NPV of \$31. At r = 17%. MIRRA = 14. However. MIRRB = 15.53%. MIRRB = 19.10)2 + \$100/(1. Thus. When a conflict exists the NPV method must be used. To find the crossover rate.10)1 + \$193/(1. if the cost of capital is less than the crossover rate the two methods lead to different project selections--a conflict exists. Project B has an NPV of \$75. choose Project B if r = 17%. Project A would be selected.34 as compared to Project B's NPV of \$178. Project ∆ has multiple IRRs.459. Because of the sign changes and the size of the cash flows. MIRRA = 17.10)7 = \$978.c.

250.07%.750. If the firm could invest the incremental \$10.0665 c.000 Plan A (\$10. you will see an "Error-Soln" message. but will receive \$1.A) \$ 0 (10.000.000 at a return of 16.250.750.750.750.000.000 at 16.750. Now enter 10  STO  IRR/YR and the 14. if r > 16.000 0 Incremental Cash Flow (B .07%.22%.53% IRR is found. b. Excel or Lotus 1-2-3 can also be used.000 per year in Years 2-20. See graph.750.0665%. Financial calculator solution: Inputs 19 N I -10250000 PV 1750000 PMT 0 FV Output = 16.000.07% A 5 IRRB = 16. Year 0 1 2-20 Plan B (\$10. it would receive cash flows of \$1.250. assuming (1) equal risk among projects.000 If the firm goes with Plan B. NPV (Millions of Dollars) 25 20 B 15 10 Crossover Rate = 16. it will forgo \$10. If the cost of capital is less than 16. Similarly. we would find that payments of \$1.000. then Plan A is preferred.000) 12. Yes. 12-14 a.250.000) 1.7% IRRA = 20% 5 10 15 20 25 Cost of Capital (%) . and (2) that the cost of capital is a constant and does not vary with the amount of capital raised. then Plan B should be accepted.000 1.000) 1.flows into the g register of an HP-10B.000 per year for 19 years would amortize a loan of \$10. d. Then enter 100  STO  IRR/YR to obtain IRR = 456.07%.000 in Year 1. If we set up an amortization schedule.

946. .000 = \$18.946.510 .946.03 IRRA = 15.26%.510.117 NPVB = \$28. Financial calculator solution: Plan A Inputs 20 N 10 I/YR PV 8000000 PMT 0 FV Output Plan B Inputs 20 N = -68.108.108.26 IRRB = 22.\$50.000. Plan B Inputs 20 N I/YR -15000000 PV 3400000 PMT 0 FV Output = 22. 10 I/YR PV 3400000 PMT 0 FV Output = -28.510 NPVA = \$68.108.\$15. Plan A Inputs 20 N I/YR -50000000 PV 8000000 PMT 0 FV Output = 15.12-15 a.000 = \$13.117 .000.03%.117.

its cash flows will be (in millions of dollars): Cash Flows Cash Flows Project ∆ Year from A from B Cash Flows 0 (\$50) (\$15.162. If the company takes Plan A rather than B. . Inputs 20 N 10 I/YR PV 4600000 PMT 0 FV Output = -39. .000 = \$4.393. . and since we should accept ∆. . .6 2 8 3. .b.0) 1 8 3.162. .71 IRR∆ = 11. Project ∆ has a "cost" of \$35. Since IRR∆ > r. .000 per year for 20 years. In addition.393 NPV∆ = \$39.162. .6 So. 20 8 3. we use the NPV method for choosing the best project.4 4. Inputs 2 -35000000 4600000 N I/YR PV PMT 0 FV Output = 11.6 . .4 4. This means accept the larger project (Project A). when dealing with mutually exclusive projects.393 .000 and "inflows" of \$4.0) (\$35.71%. .000.600. .000.4 4.\$35.

while use of the IRR method implies the opportunity to reinvest at the IRR. and ready access to capital markets. NPV (Millions of Dollars) 125 A 100 Crossover Rate = 11. all projects with an NPV > 0 will be accepted by the firm. If the firm's cost of capital is constant at 10 percent.7% d. As cash flows come in from these projects. given a constant expected future cost of capital. which is an incorrect assumption.26% 25 5 10 15 20 25 30 Cost of Capital (%) -25 ∆ -50 IRR∆ = 11. or use them as a substitute for outside capital which costs 10 percent. . the firm will either pay them out to investors. The IRR method assumes reinvestment at the internal rate of return itself.7% 75 B 50 IRRA = 15. The NPV method implicitly assumes that the opportunity exists to reinvest the cash flows generated by a project at the cost of capital. this is their opportunity cost reinvestment rate.c. Thus.03% IRRB = 22. since these cash flows are expected to save the firm 10 percent.