978-1259289903 Chapter 7 Solution Manual Part 4

subject Type Homework Help
subject Pages 9
subject Words 944
subject Textbook Corporate Finance: Core Principles and Applications 5th Edition
subject Authors Bradford Jordan, Jeffrey Jaffe, Randolph Westerfield, Stephen Ross
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page-pf1
CHAPTER 7 B - 1
30. The IRR is the interest rate that makes the NPV of the project equal to zero. So, the IRR of the project
is:
0 = $50,000 – $61,000/(1 + IRR) + $41,000/(1 + IRR)2
Even though it appears there are two IRRs, a spreadsheet, financial calculator, or trial and error will
not give an answer. The reason is that there is no real IRR for this set of cash flows. If you examine
the IRR equation, what we are really doing is solving for the roots of the equation. Going back to high
school algebra, in this problem we are solving a quadratic equation. In case you don’t remember, the
quadratic equation is:
Calculator Solutions
1. b.
Project A
CFo
–$15,300
CFo
–$10,700
C01
$8,700
C01
$5,300
F01
1
F01
1
C02
$7,400
C02
$4,300
F02
1
F02
1
C03
$3,100
C03
$4,800
F03
1
F03
1
I = 15%
NPV CPT
–$101.02
7.
CFo
–$16,100
C01
$7,800
F01
1
C02
$9,100
F02
1
C03
$5,300
F03
1
IRR CPT
page-pf2
CHAPTER 7 B - 2
19.11%
8.
Project A
Project B
CFo
–$6,700
CFo
–$4,600
C01
$2,100
C01
$1,800
F01
1
F01
1
C02
$3,900
C02
$2,300
F02
1
F02
1
C03
$2,700
C03
$1,900
F03
1
F03
1
IRR CPT
13.71%
9.
CFo
0
C01
$64,000
F01
7
I = 15%
NPV CPT
$266,266.86
PI = $266,266.86/$207,000 = 1.286
12.
CFo
$14,700
C01
–$5,800
F01
1
C02
–$5,300
F02
1
C03
–$4,300
F03
1
C04
–$3,700
F04
1
IRR CPT
12.41%
CFo
$14,700
CFo
$14,700
C01
–$5,800
C01
–$5,800
F01
1
F01
1
C02
–$5,300
C02
–$5,300
F02
1
F02
1
C03
–$4,300
C03
–$4,300
F03
1
F03
1
C04
–$3,700
C04
–$3,700
F04
1
F04
1
I = 10%
NPV CPT
–$710.70
page-pf3
CHAPTER 7 B - 3
13. a.
Deepwater fishing
CFo
–$835,000
CFo
–$1,650,000
C01
$450,000
C01
$1,050,000
F01
1
F01
1
C02
$410,000
C02
$675,000
F02
1
F02
1
C03
$335,000
C03
$520,000
F03
1
F03
1
IRR CPT
21.49%
b.
CFo
–$815,000
C01
$600,000
F01
1
C02
$265,000
F02
1
C03
$185,000
F03
1
IRR CPT
17.65%
c.
Deepwater fishing
CFo
–$835,000
CFo
–$1,650,000
C01
$450,000
C01
$1,050,000
F01
1
F01
1
C02
$410,000
C02
$675,000
F02
1
F02
1
C03
$335,000
C03
$520,000
F03
1
F03
1
I = 15%
NPV CPT
$86,591.19
14.
Project I
CFo
$0
CFo
–$68,000
C01
$37,000
C01
$37,000
F01
3
F01
3
I = 10%
NPV CPT
$92,013.52
PI = $92,013.53/$68,000 = 1.353
Project II
CFo
$0
CFo
–$38,000
C01
$23,000
C01
$23,000
F01
3
F01
3
I = 10%
page-pf4
CHAPTER 7 B - 4
NPV CPT
$57,197.60
15.
CFo
–$67,000,000
CFo
–$67,000,000
C01
$97,000,000
C01
$97,000,000
F01
1
F01
1
C02
–$13,000,000
C02
–$13,000,000
F02
1
F02
1
I = 10%
IRR CPT
NPV CPT
29.83%
$10,438,016.53
a root solving calculator, the other IRR is –85.06%.
16. b.
Board game
DVD
CFo
–$345,000
CFo
–$570,000
C01
$265,000
C01
$360,000
F01
1
F01
1
C02
$150,000
C02
$290,000
F02
1
F02
1
C03
$98,000
C03
$185,000
F03
1
F03
1
I = 10%
NPV CPT
$93,504.88
c.
Board game
DVD
CFo
–$345,000
CFo
–$570,000
C01
$265,000
C01
$360,000
F01
1
F01
1
C02
$150,000
C02
$290,000
F02
1
F02
1
C03
$98,000
C03
$185,000
F03
1
F03
1
IRR CPT
28.08%
d.
CFo
–$225,000
C01
$95,000
F01
1
C02
$140,000
F02
1
C03
$87,000
F03
1
IRR CPT
20.49%
page-pf5
CHAPTER 7 B - 5
17. a.
L6
G5
Wi-Fi
CFo
0
CFo
0
CFo
0
C01
$15,000,000
C01
$23,000,000
C01
$23,000,000
F01
1
F01
1
F01
1
C02
$13,000,000
C02
$29,000,000
C02
$42,000,000
F02
1
F02
1
F02
1
C03
$9,000,000
C03
$21,000,000
C03
$39,000,000
F03
1
F03
1
F03
1
I = 10%
I = 10%
NPV CPT
NPV CPT
$31,141,998.80
$84,921,111.15
b.
L6
G5
Wi-Fi
CFo
–$20,000,000
CFo
–$35,000,000
CFo
–$55,000,000
C01
$15,000,000
C01
$23,000,000
C01
$23,000,000
F01
1
F01
1
F01
1
C02
$13,000,000
C02
$29,000,000
C02
$42,000,000
F02
1
F02
1
F02
1
C03
$9,000,000
C03
$21,000,000
C03
$39,000,000
F03
1
F03
1
F03
1
I = 10%
I = 10%
NPV CPT
NPV CPT
$11,141,998.50
$29,921,111.95
18. b.
AZM
AZF
CFo
–$650,000
CFo
–$975,000
C01
$370,000
C01
$490,000
F01
1
F01
1
C02
$310,000
C02
$460,000
F02
1
F02
1
C03
$260,000
C03
$410,0000
F03
1
F03
1
I = 10%
NPV CPT
$137,903.83
c.
AZM
AZF
CFo
–$650,000
CFo
–$975,000
C01
$370,000
C01
$490,000
F01
1
F01
1
C02
$310,000
C02
$460,000
F02
1
F02
1
C03
$260,000
C03
$410,0000
F03
1
F03
1
IRR CPT
page-pf6
CHAPTER 7 B - 6
22.51%
19. a.
Project A
Project B
Project C
CFo
0
CFo
0
CFo
0
C01
$135,000
C01
$240,000
C01
$140,000
F01
2
F01
2
F01
1
C02
C02
C02
$125,000
F02
F02
F02
1
I = 12%
I = 12%
NPV CPT
NPV CPT
$228,156.89
$224,649.23
PIC = $224,649.23/$200,000 = 1.123
b.
Project A
Project B
Project C
CFo
–$200,000
CFo
–$350,000
CFo
–$200,000
C01
$135,000
C01
$240,000
C01
$140,000
F01
2
F01
2
F01
1
C02
C02
C02
$125,000
F02
F02
F02
1
I = 12%
I = 12%
NPV CPT
NPV CPT
$28,156.89
$24,649.23
d.
Project B – A
CFo
–$150,000
C01
$115,000
F01
2
C02
F02
I = 12%
NPV CPT
$27,455.36
PI(B – A) = $177,455.36/$150,000 = 1.183
20. b.
Dry prepeg
CFo
–$1,800,000
CFo
–$925,000
C01
$690,000
C01
$565,000
F01
1
F01
1
C02
$430,000
C02
$410,000
F02
1
F02
1
C03
$1,400,000
C03
$340,0000
F03
1
F03
1
I = 10%
NPV CPT
$234,485.35
page-pf7
CHAPTER 7 B - 7
c.
Dry prepeg
CFo
–$1,800,000
CFo
–$925,000
C01
$690,000
C01
$565,000
F01
1
F01
1
C02
$430,000
C02
$410,000
F02
1
F02
1
C03
$1,400,000
C03
$340,0000
F03
1
F03
1
IRR CPT
16.34%
d.
CFo
–$875,000
C01
$125,000
F01
1
C02
$20,000
F02
1
C03
$1,060,000
F03
1
IRR CPT
12.33%
21. a.
NP-30
NX-20
CFo
–$940,000
CFo
–$650,000
C01
$345,000
C01
$250,000
F01
1
F01
2
C02
$335,000
C02
$245,000
F02
1
F02
1
C03
$310,000
C03
$230,000
F03
1
F03
1
C04
$295,000
C04
$175,000
F04
1
F04
1
C05
$205,000
C05
F05
1
F05
I = 12%
NPV CPT
$159,547.88
b.
NP-30
NX-20
CFo
–$940,000
CFo
–$650,000
C01
$345,000
C01
$250,000
F01
1
F01
2
C02
$335,000
C02
$245,000
F02
1
F02
1
C03
$310,000
C03
$230,000
F03
1
F03
1
C04
$295,000
C04
$175,000
F04
1
F04
1
C05
$205,000
C05
F05
1
F05
page-pf8
CHAPTER 7 B - 8
IRR CPT
19.18%
c.
CFo
–$290,000
C01
$95,000
F01
1
C02
$85,000
F02
1
C03
$65,000
F03
1
C04
$65,000
F04
1
C05
$30,000
F05
1
IRR CPT
6.56%
d.
NP-30
NX-20
CFo
0
CFo
0
C01
$345,000
C01
$250,000
F01
1
F01
2
C02
$335,000
C02
$245,000
F02
1
F02
1
C03
$310,000
C03
$230,000
F03
1
F03
1
C04
$295,000
C04
$175,000
F04
1
F04
1
C05
$205,000
C05
F05
1
F05
I = 12%
NPV CPT
$1,099,547.88
22. a.
Project A
Project B
CFo
–$675,000
CFo
–$1,150,000
C01
$330,000
C01
$345,000
F01
2
F01
1
C02
$260,000
C02
$375,000
F02
1
F02
1
C03
$195,000
C03
$385,000
F03
1
F03
1
C04
$135,000
C04
$455,000
F04
1
F04
1
C05
C05
$575,000
F05
F05
1
I = 15%
NPV CPT
page-pf9
CHAPTER 7 B - 9
$211,048.89
b.
Project A
Project B
CFo
–$675,000
CFo
–$1,150,000
C01
$330,000
C01
$345,000
F01
2
F01
1
C02
$260,000
C02
$375,000
F02
1
F02
1
C03
$195,000
C03
$385,000
F03
1
F03
1
C04
$135,000
C04
$455,000
F04
1
F04
1
C05
C05
$575,000
F05
F05
1
IRR CPT
29.74%
c.
CFo
–$475,000
C01
$15,000
F01
1
C02
$45,000
F02
1
C03
$125,000
F03
1
C04
$260,000
F04
1
C05
$440,000
F05
1
IRR CPT
16.27%
d.
Project A
Project B
CFo
0
CFo
0
C01
$330,000
C01
$345,000
F01
2
F01
1
C02
$260,000
C02
$375,000
F02
1
F02
1
C03
$195,000
C03
$385,000
F03
1
F03
1
C04
$135,000
C04
$455,000
F04
1
F04
1
C05
C05
$575,000
F05
F05
1
I = 15%
NPV CPT
$886,048.89
page-pfa
30.
CFo
$50,000
C01
–$61,000
F01
1
C02
$41,000
F02
1
IRR CPT
ERROR 7

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