978-1259289903 Chapter 7 Solution Manual Part 4

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

$316.19

7.

CFo

–$16,100

C01

$7,800

F01

1

C02

$9,100

F02

1

C03

$5,300

F03

1

IRR CPT

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%

14.40%

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%

I = 20%

NPV CPT

–$710.70

$1,913.35

CHAPTER 7 B – 3

13. a.

Deepwater fishing

Submarine ride

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%

19.77%

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

Submarine ride

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

$115,348.89

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

$21,987.23

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%

CHAPTER 7 B – 4

NPV CPT

$57,197.60

$19,197.60

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

$135,935.39

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%

24.78%

d.

CFo

–$225,000

C01

$95,000

F01

1

C02

$140,000

F02

1

C03

$87,000

F03

1

IRR CPT

20.49%

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%

NPV CPT

$31,141,998.80

$60,653,643.88

$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%

NPV CPT

$11,141,998.50

$25,653,643.88

$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

$158,658.90

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

CHAPTER 7 B – 6

22.51%

19.33%

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

$125,000

F02

1

I = 12%

NPV CPT

$228,156.89

$405,612.24

$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

$125,000

F02

1

I = 12%

NPV CPT

$28,156.89

$55,612.24

$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

Solvent 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

$182,926.37

CHAPTER 7 B – 7

c.

Dry prepeg

Solvent 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%

22.06%

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

$192,367.77

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

CHAPTER 7 B – 8

IRR CPT

19.18%

23.98%

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

$842,367.77

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

$575,000

F05

1

I = 15%

NPV CPT

CHAPTER 7 B – 9

$211,048.89

$232,721.97

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

$575,000

F05

1

IRR CPT

I = 15%

29.74%

22.55%

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

$575,000

F05

1

I = 15%

NPV CPT

$886,048.89

$1,382,721.97

30.

CFo

$50,000

C01

–$61,000

F01

1

C02

$41,000

F02

1

IRR CPT

ERROR 7