P10-10. NPV—mutually exclusive projects
LG 3; Intermediate
a. and b.
Press A
c. Ranking—using NPV as criterion
Rank Press NPV
1 C $15,043.89
d. Profitability Indexes
Profitability Index S Present Value Cash Inflows ¸ Investment
e. The profitability index measure indicates that Press C is the best, then Press B, then Press A
(which is unacceptable). This is the same ranking as was generated by the NPV rule.
P10-11. Personal finance: Long-term investment decisions, NPV method
LG 3
Key information:
Cost of MBA program $100,000
($50,000 for tuition and $50,000 for lost earnings)
P10-12. Payback and NPV
LG 2, 3; Intermediate
a.
Project Payback Period
A $40,000 ¸ $13,000 3.08 years
Project C, with the shortest payback period, is preferred.
b. Worksheet keystrokes
Year Project A Project B Project C
0$40,000 $40,000 $40,000
Project C is preferred using the NPV as a decision criterion.
c. At a cost of 16%, Project C has the highest NPV. Because of Project C’s cash flow
P10-13. NPV and EVA
LG 3; Intermediate
a. NPV $2,500,000 $240,000 ¸ 0.09 $166,667
P10-14. IRR—Mutually exclusive projects
LG 4; Intermediate
IRR is found by solving:
1
$0 initial investment
(1 IRR)
nt
t
t
CF
=
é ù
= –
ê ú
+
ë û
å
Project A
Project B
CF0 $490,000; CF1 $150,000; CF2 $150,000; CF3 $150,000; CF4 $150,000
Project C
CF0 $20,000; CF1 $7500; CF2 $7500; CF3 $7500; CF4 $7500; CF5 $7500
Project D
P10-15. IRR
LG 4; Intermediate
The IRR of the project is 4%. Because the IRR is lower than the firm’s cost of capital, the firm
P10-16. IRR—Mutually exclusive projects
LG 4; Intermediate
a. and b.
Project X
1 2 3 4 5
$100,000 $120,000 $150,000 $190,000 $250,000
$0 $500,000
(1 IRR) (1 IRR) (1 IRR) (1 IRR) (1 IRR)
= + + + + –
+ + + + +
CF0 −$500,000; CF1 $100,000; CF2 $120,000; CF3 $150,000; CF4 $190,000
CF5 $250,000
Solve for IRR 15.67; because IRR cost of capital, accept the project.
Project Y
1 2 3 4 5
$140,000 $120,000 $95,000 $70,000 $50,000
$0 $325,000
(1 IRR) (1 IRR) (1 IRR) (1 IRR) (1 IRR)
= + + + + –
+ + + + +
CF0 $325,000; CF1 $140,000; CF2 $120,000; CF3 $95,000; CF4 $70,000
CF5 $50,000
Solve for IRR 17.29%; because IRR cost of capital, accept the project.
c. Project Y, with the higher IRR, is preferred, although both are acceptable.
P10-17. Personal Finance: Long-term investment decisions, IRR method
LG 4; Intermediate
IRR is the rate of return at which NPV equals zero
P10-18. IRR, investment life, and cash inflows
LG 4; Challenge
a. N 10, PV −$61,450, PMT $10,000
b. I 15%, PV $61,450, PMT $10,000
c. N 10, I 15%, PV $61,450
P10-19. NPV and IRR
LG 3, 4; Intermediate
a. N 7, I 10%, PMT $4,000
b. N 7, PV $18,250, PMT $4,000
c. The project should be accepted because the NPV 0 and the IRR the cost of capital.
P10-20. NPV, with rankings
LG 3, 4; Intermediate
a. NPVA $45,665.50 (N 3, I 15, PMT $20,000) $50,000
b.
Rank Press NPV
1 C $7,088.02
c. Using the calculator, the IRRs of the projects are:
Project IRR
A 9.70%
P10-21. All techniques, conflicting rankings
LG 2, 3, 4: Intermediate
a.
Project A Project B
Year
Cash
Inflows
Investment
Balance Year
Cash
Inflows
Investment
Balance
0$150,000 0 $150,000
NPVB:
d. IRRA:
CF0 $150,000; CF1 $45,000; F1 6
e.
Rank
Project Payback NPV IRR
A 2 1 2
The project that should be selected is A. The conflict between NPV and IRR is due partially
f. NPVA:
CF0 $150,000; CF1 $45,000; F1 6
P10-22. Payback, NPV, and IRR
LG 2, 3, 4; Intermediate
a. Payback period
b. NPV computation
c.
1 2 3 4 5
$20,000 $25,000 $30,000 $35,000 $40,000
$0 $95,000
(1 IRR) (1 IRR) (1 IRR) (1 IRR) (1 IRR)
= + + + + –
+ + + + +
CF0 $95,000; CF1 $20,000; CF2 $25,000; CF3 $30,000; CF4 $35,000
CF5 $40,000
Solve for IRR 15.36%
d. NPV $9,080; because NPV 0, accept
P10-23. NPV, IRR, and NPV profiles
LG 3, 4, 5; Challenge
a. and b.
Project A