Homework Chapter 8

EXERCISE 8.1
1.
Cumulative Cash
Year Cash Flow Flow
1 -14,000 -14,000
2 -6,000 -20,000
3 2,500 -17,500
4 4,000 -13,500
5 5,000 -8,500
6 6,000 -2,500
7 5,000 2,500
8 4,000 6,500
9 3,000 9,500
10 2,000 11,500

Payback period = 6.5 Years

2. No

EXERCISE 8.2
1.
now year 1 year 2 year 3 year 4 year 5
Initial investment $ (27,000)
Annual Cost Saving $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 7,000
Total cash flow $ (27,000) $ 7,000 $ 7,000 $ 7,000 $ 7,000 $ 7,000
Discount factor (12%) $ 1.000 $ 0.893 $ 0.783 $ 0.693 $ 0.631 $ 0.543
Present value of cash flow $ (27,000) $ 6,251 $ 5,481 $ 4,851 $ 4,417 $ 3,801
Net Present Value $ (2,199)

2.
Total Cost Saving $ 35,000
Initial investment $ 27,000
Net Cash Flow $ 8,000
EXERCISE 8.3
1. Annual Cash flows of the machine = Savings + Extra contribution = 3800 + (1000 x 1.20)=
$5,000.00

2.
Factor of the IRR = Investment required / Annual Cash Flow = $18,600 / $5,000 = 3.720
Internal Rate of Return = 15.64% (Excel IRR function)

3. Internal Rate of Return, including salvage value = 22% (Excel IRR function)

EXERCISE 8.4
Annual savings = $400,000
Costs = $2,500,000
n =15
r = 20%
PV Cash Inflow = 400,000 x 4.675 = 1,870,000
NPV = PV Cash Flow – Cost = $ -630,000

Annual value = Required increase in present value / Factor for 15 years = $ 134,759.36

Exercise 8.5
1. Project profitability index = NPV Project = Investment Required
PI A = 0.4
PI B = 0.38
PI C = 0.5
PI D = 0.33

2. C, A, B, D