Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Answers and Solutions: 10 - 21
100 3,200,000
200 2,055,556
300 962,500
400 140,000
410 70,204
c. Other possible projects with multiple rates of return could be nuclear power plants
leveraged leases where the borrowed funds are repaid at the end of the lease life.
(See Chapter 18 of Financial Management, 13th edition for more information on
leases.)
d. Here is the MIRR for the project when r = 8%:
PV costs = $4,400,000 + $25,000,000/(1.08)2 = $25,833,470.51.
Output = 7.61
N
I/YR
FV
PMT
PV
website, in whole or in part.
Now, MIRR is that discount rate which forces the PV of the TV of $31,578,000 over
$23,636,688.21 = $31,578,000(PVIFr,2).
Inputs 2 -23636688.21 0 31578000
the project if r = 14%, which is less than the corresponding MIRR of 15.58%.
10-20 a. The IRRs of the two alternatives are undefined. To calculate an IRR, the cash flow
stream must include both cash inflows and outflows.
b. The PV of costs for the conveyor system is ($911,067), while the PV of costs for the
Input: CF0 = -200000, CF1 = -160000, Nj = 5, I/YR = 8, NPVF = ? NPVF = -838,834.
10-21 a. Payback A (cash flows in thousands):
Annual
Period Cash Flows Cumulative
N
I/YR
FV
PMT
PV
website, in whole or in part.
Annual
Period Cash Flows Cumulative
0 ($25,000) ($25,000)
1 20,000 (5,000)
2 10,000 5,000
Period Cash Flows Cash Flows Cumulative
0 ($25,000) ($25,000.00) ($25,000.00)
1 5,000 4,545.45 (20,454.55)
2 10,000 8,264.46 (12,190.09)
3 15,000 11,269.72 (920.37)
1 20,000 18,181.82 (6,818.18)
2 10,000 8,264.46 1,446.28
3 8,000 6,010.52 7,456.80
4 6,000 4,098.08 11,554.88
Discounted PaybackB = 1 + $6,818.18/$8,264.46 = 1.825 years.
website, in whole or in part.
d. At a discount rate of 5%, NPVA = $18,243,813.
At a discount rate of 5%, NPVB = $14,964,829.
f. Project ∆ =
Year CFA – CFB
0 $ 0
1 (15)
2 0
calculated. With a financial calculator, enter the cash inflow stream into the
cash flow registers being sure to enter 0 for CF0, then enter I/YR = 10, and
solve for NPV = $37,739,908.
Step 2: Calculate the FV of the cash inflow stream as follows:
Enter N = 4, I/YR = 10, PV = -37739908, and PMT = 0 to solve for FV =
calculated. With a financial calculator, enter the cash inflow stream into the
cash flow registers being sure to enter 0 for CF0, then enter I/YR = 10, and
solve for NPV = $36,554,880.
Answers and Solutions: 10 - 26
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Step 2: Calculate the FV of the cash flow stream as follows:
Enter N = 4, I/YR = 10, PV = -36554880, and PMT = 0 to solve for FV =
$53,520,000.
Step 3: Calculate MIRRB as follows:
Enter N = 4, PV = -25000000, PMT = 0, and FV = 53520000 to solve for
I/YR = 20.96%.
According to the MIRR approach, if the 2 projects were mutually exclusive, Project
I/YR = 10 to solve for NPV1 = -$909.09 ≈ -$909.
Using a financial calculator, input the following: CF0 = -22500, CF1 = 6250, CF2 =
20250, and I/YR = 10 to solve for NPV2 = -$82.64 ≈ -$83.
Using a financial calculator, input the following: CF0 = -22500, CF1 = 6250, Nj = 5,
and I/YR = 10 to solve for NPV5 = $1,192.42 ≈ $1,192.
website, in whole or in part.
SOLUTION TO SPREADSHEET PROBLEM
10-23 The detailed solution for the problem is available in the file Solution for Ch10 P23 Build
a Model.xlsx at the textbook’s Web site.
MINI CASE
You have just graduated from the MBA program of a large university, and one of your
favorite courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have
decided you want to “be your own boss.” While you were in the master’s program, your
grandfather died and left you $1 million to do with as you please. You are not an inventor
and you do not have a trade skill that you can market; however, you have decided that you
would like to purchase at least one established franchise in the fast-foods area, maybe two
(if profitable). The problem is that you have never been one to stay with any project for
too long, so you figure that your time frame is three years. After three years you will sell
off your investment and go on to something else.
You have narrowed your selection down to two choices; (1) Franchise L, Lisa’s Soups,
Salads, & Stuff and (2) Franchise S, Sam’s Fabulous Fried Chicken. The net cash flows
shown below include the price you would receive for selling the franchise in Year 3 and the
forecast of how each franchise will do over the three-year period. Franchise L’s cash flows
will start off slowly but will increase rather quickly as people become more health
conscious, while Franchise S’s cash flows will start off high but will trail off as other
chicken competitors enter the marketplace and as people become more health conscious
and avoid fried foods. Franchise L serves breakfast and lunch, while Franchise S serves
only dinner, so it is possible for you to invest in both franchises. You see these franchises as
perfect complements to one another: You could attract both the lunch and dinner crowds
and the health conscious and not so health conscious crowds without the franchises directly
competing against one another.
Here are the net cash flows (in thousands of dollars):
Expected Net Cash Flows
Year Franchise L Franchise S
0 ($100) ($100)
1 10 70
2 60 50
3 80 20
Depreciation, salvage values, net working capital requirements, and tax effects are all
included in these cash flows.
You also have made subjective risk assessments of each franchise, and concluded that
both franchises have risk characteristics that require a return of 10%. You must now
determine whether one or both of the franchises should be accepted.
Mini Case: 10 - 29
a. What is capital budgeting?
b. What is the difference between independent and mutually exclusive projects?
c. 1. Define the term net present value (NPV). What is each franchise’s NPV?
NPV =
N
0t t
t
)r1(
CF
.
Mini Case: 10 - 30
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
website, in whole or in part.
Franchise L’s NPV is $18.79:
0 1 2 3
| | | |
(100.00) 10 60 80
9.09
49.59
60.11
18.79 = NPVL
c. 2. What is the rationale behind the NPV method? According to NPV, which
franchise or franchises should be accepted if they are independent? Mutually
exclusive?
are fixed, so the shareholders’ wealth will be increased by $18.79 if Franchise L is
to the value of the firm.
c. 3. Would the NPVs change if the cost of capital changed?
10%
