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Project B
c.
Data for NPV Profiles
NPV
Discount Rate A B
0% $80,000 $35,000
d. The net present value profile indicates that there are conflicting rankings at a discount rate
e. Project A has an increasing cash flow from Year 1 through Year 5, whereas Project B has a
P10-24. All techniques—decision among mutually exclusive investments
LG 2, 3, 4, 5, 6; Challenge
Project
A B C
Cash inflows (years 15) $20,000 $ 31,500 $ 32,500
*Supporting calculations shown below:
a. Payback Period: $60,000 Project A: ¸ $20,000 3 years
Project $100,000 B: ¸ $31,500 3.2 years
Project $110,000 C: ¸ $32,500 3.4 years
b. NPV
Project A
Project B
Project C
c. IRR
Project A
Project B
Project C
d.
Data for NPV Profiles
NPV
Discount Rate A B C
0% $40,000 $57,500 $52,500
e. Even though A ranks higher in Payback and IRR, financial theorists would argue that B is
P10-25. All techniques with NPV profile—mutually exclusive projects
LG 2, 3, 4, 5, 6; Challenge
a. Project A
Payback period
Year 1 Year 2 Year 3 $60,000
Project B
b. Project A
Project B
c. Project A
Project B
d.
Data for NPV Profiles
NPV
Discount Rate A B
0% $45,000 $25,000
e. Both projects are acceptable. Both have similar payback periods, positive NPVs, and
P10-26. Integrative—Multiple IRRs
LG 6; Basic
a. First the project does not have an initial cash outflow. It has an inflow, so the payback is
b. CF0 $200,000, CF1 920,000, CF2 $1,582,000, CF3 $1,205,200, CF4 $343,200
c. There are multiple IRRs because there are several discount rates at which the NPV is zero.
d. It would be difficult to use the IRR approach to answer this question because it is not clear
e. It is best simply to use NPV in a case where there are multiple IRRs due to the changing
P10-27. Integrative—Conflicting Rankings
LG 3, 4, 5; Intermediate
a. Plant Expansion
b.
Rank
Project NPV IRR PI
Plant Expansion 1 2 2
Product Introduction 2 1 1
c. The NPV is higher for the plant expansion, but both the IRR and the PI are higher for the
d. Because the NPV of the plant expansion project is higher, the firm’s shareholders would be
P10-28. Ethics problem
LG 1, 6; Intermediate
Year LED Project Solar Project
0 –$4,200,000 –$500,000
aLED project
I = 10
SOLAR project
b Combined project
c) If Diane agrees to combining the two projects into a single proposal, the company would not be
nCase
Case studies are available on www.myfinancelab.com.
Making Norwich Tool’s Lathe Investment Decision
The student is faced with a typical capital budgeting situation in Chapter 10’s case. Norwich Tool must
a. Payback period
Lathe A:
Lathe B:
b. 1. NPV
Year
Discount
Rate
Lathe A
Cash Flow PV
Lathe B
Cash Flow PV
0 13% −$660,000 $58,132.88 $360,000 $43,483.24
1 128,000 $88,000
2. IRR
Lathe A
1 2 3 4 5
$128,000 $182,000 $166,000 $168,000 $450,000
$0 $660,000
(1 IRR) (1 IRR) (1 IRR) (1 IRR) (1 IRR)
= + + + + -
+ + + + +
IRR 15.95%
Lathe B
1 2 3 4 5
$88,000 $120,000 $96,000 $86,000 $207,000
$0 $360,000
(1 IRR) (1 IRR) (1 IRR) (1 IRR) (1 IRR)
= + + + + -
+ + + + +
IRR 17.34%
Under the NPV rule, both lathes are acceptable because the NPVs for A and B are greater than 0.
Lathe A ranks ahead of B because it has a larger NPV. The same accept decision applies to both
projects with the IRR because both IRRs are greater than the 13% cost of capital. However, the
ranking reverses with the 17.34% IRR for B being greater than the 15.95% IRR for Lathe A.
c. Summary
Lathe A Lathe B
d. To create an NPV profile, it is best to have at least three NPV data points. To create the third point an
e. On a theoretical basis, Lathe A should be preferred because of its higher NPV and thus its known
nSpreadsheet Exercise
The answer to Chapter 10’s Drillago Company spreadsheet problem is located on the Instructor’s
Resource Center at www.pearsonhighered.com/irc under the Instructor’s Manual.
nGroup Exercise
Group exercises are available on www.myfinancelab.com.
This assignment continues the long-term investment projects designed in the previous chapter. Students were
