1.

Annual cash inflows for 7 years = $900,000

Present value of annuity of uniform cash flows = Annual cash flows*{1-(1+r)-n}/r

Present value of annual cash inflows = $900,000*(1-1.05-7)/0.05 = $5,207,736.06

NPV = - Initial investment + Present value of annual cash inflows = -$4,000,000 + $5,207,736.06 =
$1,207,736.06

2.

a. Present value of annual cash inflows = $19,000*(1-1.07-11)/0.07 = $142,474.81

NPV = - $90,000 + $142,474.81 = $52,474.81

The project should be accepted because the NPV is positive and therefore adds value to the firm.

b.

Present value of annual cash inflows = $19,000*(1-1.16-11)/0.16 = $95544.24

NPV = - $90,000 + $95,544.24 = $5,544.24

The project should be accepted because the NPV is positive.

c.

Internal rate of return using excel formula = 0.1754 = 17.54%

If the project's required discount rate is 7%, then the project should be accepted because the IRR is
higher than the required discount rate.

If the project's required discount rate is 16%, then the project should be accepted because the IRR is
higher than the required discount rate.

3.

a.

a. Present value of cost of alternative A = $95,000 + $19,000*(1-1.10-7)/0.10 = $95,000 + $92,499.96

= $187,499.96

Equivalent annual cost of alternative A = ($187,499.96*0.10)/(1-1.10-7) = $38,513.52

b. Present value of Alternative B = $95,000 + $5,000*(1-1.10-3)/0.10 = $95,000 + $12,434.26 =

$107,434.26

Equivalent annual cost of alternative B = ($107,434.26*0.10)/(1-1.10-3) = $43,200.91

b.
Correct answer is c. Alternative A should be selected because its equivalent annual cost is less
per year than the annual equivalent cost for Alternative B

4.

IRR = ($15,424/$9,000)1/7 1 = 0.0799 = 8%

5.

IRR using excel function IRR = 0.1898 = 18.98%

6.

Initial cash outflow = $810 million + $350 million + ($280 million * 0.9) = $1,412 million

IRR using excel function IRR = 14.93%

7.

a. NPV of Project A = -$110,000 + $30,000*(1-1.11-5)/0.11 = $876.91

b. NPV of Project B = -$110,000 + $210,000/1.115 = $14,624.78

Correct answer is d. Choose B because its NPV is higher