Professional Documents
Culture Documents
CH 7 Solutions FINAL
CH 7 Solutions FINAL
Solutions to Problems
7.1 A rate of return of 100% means that the entire investment is lost.
(b) A = 10,000(A/P,10%,4)
= 10,000(0.31547)
= $3154.70
Chapter 7 1
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
7.8 0 = -130,000 49,000(P/A,i%,8) + 78,000(P/A,i%,8) + 1000(P/G,i%,8)
+ 23,000(P/F,i%,8)
Chapter 7 2
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
7.14 Cash flow tabulation is below. Note that both series end at the end of month 11.
Effective = (1 + 0.122)12 1
= 298% per year
Chapter 7 3
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
7.18 0 = -450,000 [50,000(P/A,i%,5) 10,000(P/G,i%,5)] + 10,000(P/A,i%,5)
+10,000(P/G,i%,5) + 80,000(P/A,i%,7)(P/F,i%,5)
7.22 In a conventional cash flow series, there is only one sign change in the net cash
flow. A nonconventional series has more than one sign change.
7.23 Descartes rule uses net cash flows while Norstroms criterion is based on
cumulative cash flows.
(a) From net cash flow column, there are two possible i* values
Chapter 7 4
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
(b) In cumulative cash flow column, sign starts negative but it changes twice.
Therefore, Norstroms criterion is not satisfied. Thus, there may be up to two i*
values. However, in this case, since the cumulative cash flow is negative, there
is no positive rate of return value.
7.26 (a) There are two sign changes, indicating that there may be two real-number rate of
return values.
7.27 (a) There are three sign changes, Therefore, there are three possible i* values.
7.28 The net cash flow and cumulative cash flow are shown below.
(a) There are four sign changes in net cash flow, so, there are four possible
i* values.
(b) Cumulative cash flow starts negative and changes only once. Therefore, there is
only one positive, real solution.
7.29 Cumulative cash flow starts negative and changes only once, so, there is
only one positive real solution.
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
7.30 Reinvestment rate refers to the interest rate that is used for funds that are
released
from a project before the project is over.
7.31 Tabulate net cash flow and cumulative cash flow values.
(a) There are three changes in sign in the net cash flow series, so there are three
possible ROR values. However, according to Norstroms criterion regarding
cumulative cash flow, there is only one ROR value.
i = 6.3% (Excel)
(c) If Equation [7.6] is applied, all F values are negative except the last one. Therefore,
i is used in all equations. The composite ROR (i) is the same as the internal
ROR value (i*) of 6.3% per year.
(a) The cumulative cash flow starts out negatively and changes sign only once,
Chapter 7 6
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
indicating there is only one root to the equation.
(b) Apply net reinvestment procedure because reinvestment rate, c, is not equal
to i* rate of 28.6% per year:
F1 = -65 65i + 30
F2 = (-65 65i + 30)(1 + i) + 84
= -65 - 65i + 30 65i 65i2 + 30i +84
= -65i2 100i + 49
F3 = (-65i2 100i + 49)(1.15) 10
= -74.8 i2 115i + 56.4 10
= -74.8 i2 115i + 46.4
F4 = (-74.8 i2 115i + 46.4)(1.15) 12
= -86 i2 132.3i + 53.3 12
= -86 i2 132.3i + 41.3
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
F4 = -3014.57(1 + i) + 3800
7.34 Apply net reinvestment procedure because reinvestment rate, c, is not equal
to i* rate of 44.1% per year (from problem 7.29):
7.36 i = 10,000(0.08)/4
= $200 per quarter
Chapter 7 8
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
7.37 (a) i = 5,000,000(0.06)/4 = $75,000 per quarter
After brokerage fees, the City got $4,500,000. However, before brokerage
fees, the ROR equation from the Citys standpoint is:
7.38 i = 5000(0.04)/2
= $100 per six months
7.40 i = 5000(0.10)/2
= $250 per six months
Chapter 7 9
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
7.41 (a) i = 10,000,000(0.12)/4
= $300,000 per quarter
By spending $11 million, the company will save $300,000 every three months
for 25 years and will save $10,000,000 at that time. The ROR will be:
FE Review Solutions
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
7.50 i = 4500/50,000
= 9% per year
Answer is (c)
7.53 Since the bond is purchased for its face value, the interest rate received by the
purchaser is the bond interest rate of 8% per year payable quarterly. This is a
nominal interest rate per year. The effective rate per quarter is 2%
Answer is (a)
7.54 Answer is (a)
7.55 Since the bond was purchased for its face value, the interest rate received by the
purchaser is the bond interest rate of 10% per year payable quarterly. Answers (a)
and (b) are correct. Therefore, the best answer is (c).
Chapter 7 11
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
Extended Exercise 1 Solution
Solution by hand
*round-off
Jeremys payment = $2166.67
Plot year versus column (4) in the form of Figure 71 in the text.
2. More for
Jeremy Charles Jeremy
Interest $1500.00 $1031.72 $468.28
Total 6500.01 6031.71 468.30
Solution by computer
1. The following spreadsheets have the same information as the two tables above.
The x-y scatter charts are year (column A) versus total owed (column B). (The
indicator lines and curves were drawn separately.)
Chapter 7 12
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
2. The second spreadsheet shows that $468.28 more is paid by Jeremy.
Chapter 7 13
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
Chapter 7 14
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
Extended Exercise 2 Solution
The spreadsheet above summarizes all answers in $1000. Some cells must be changed to
obtain the rate of return values shown in column H. These are described below.
1. Use IRR function in year 4 and add $225 in cell C8 for year 4.
i* (sell after 4) = 38.09%
2. Use IRR function with $60 added into cell C11 for year 7.
i* (sell after 7) = 17.74%
i* (no sale after 7) = 10.95
4. Use IRR function with $25 added into cell C14 for year 10.
i* (charity after 10) = 9.5%
Chapter 7 15
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
Case Study Solution
Chapter 7 16
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
Chapter 7 17
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
Chapter 7 18
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
Chapter 7 19
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
Chapter 7 20
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.
Chapter 7 21
PROPRIETARY MATERIAL. The McGraw-Hill Companies, Inc. All rights reserved. No part of this Manual may be displayed,
reproduced or distributed in any form or by any means, without the prior written permission of the publisher, or used beyond the
limited distribution to teachers and educators permitted by McGraw-Hill for their individual course preparation. If you are a student
using this Manual, you are using it without permission.