Chapter 7
2. The compound annual growth rate is 14.6 percent.
4. The monthly interest on this loan is 0.417% (5%/12). After the first 12 months with no
payments, the balance on the loan will increase to $81,486.
To determine the size of the balloon payment at the end of the sixth year, solve for the future
6. The $800 spent to date is sunk; you cannot recoup this money regardless of how the prospective
sale works out. You should be willing to spend up to an additional $1,000 if you are confident
doing so will land the sale. Here is another way to look at it. Suppose you are certain an
8. Applying the with-without principle, the relevant cash flows for the promotional campaign are
as follows:
Year
0
1
2
3
4
5
=RATE(10,0,-.66,2.58) = 14.6%
RATE(nper, pmt, pv, [fv], [type], [guess])
=FV(.05/12,12,0,77520) = ($81,486)
FV(rate, nper, pmt, [pv], [type])
Cash flow ($ millions)
–$55
16
16
16
16
16
The annual cash flow with the investment is $1 million, and the annual cash flow without the
The PV of the 5-year cash flow of $16 million = $63.9 million. The NPV = –$55 + $63.9 =
$8.9 million. Therefore, the campaign is attractive. It prevents a large loss.
10. a. Undertake all three investments. The NPV and the IRR indicate that all of the investments
are worthwhile.
c. If the capital budget is fixed at $5.5 million, invest in C and B, and put the remaining
12. See Excel solutions at mhhe.com/higgins11e.
=PV(.08,5,16) = ($63.9)
PV(rate, nper, pmt, [fv], [type])