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1. a.
Average annual rate of return for both projects:
1. b.
Present Present Value of
Value of
$1 at 12% Greenhouse Front-End Loader Greenhouse Front-End Loader
Year 1
Year 2
Year 3
Year 4
Year 5
Total
Amount to be invested
Net present value
2.
Net Present Value Analysis
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[Key essay answer here]
Problem 25(10)-1A
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Net Cash Flow
Net Cash Flow
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1. a.
Average annual rate of return for both projects:
$51,000 5
$60,000 2
1. b.
Present Present Value of
Value of
$1 at 12% Greenhouse Front-End Loader Greenhouse Front-End Loader
Year 1 0.893 35,000$ 22,200$ 31,255$ 19,825$
Year 2 0.797 32,000 22,200 25,504 17,693
Year 3 0.712 24,000 22,200 17,088 15,806
2.
The report to the capital investment committee can take many forms. The report should, as a minimum,
present the following points:
a. Both projects offer the same average annual rate of return.
b. Although both projects exceed the selected rate established for discounted cash flows, the greenhouse
Problem 25(10)-1A
Name:
Solution
Section:
=
34.0%
Net Present Value Analysis
ON
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Net Cash Flow
Net Cash Flow
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1. a.
Average annual rate of return for both projects:
1. b.
Present
Value of Tracking Tracking
$1 at 15% Warehouse Technology Warehouse Technology
Year 1
Year 2
Year 3
Year 4
Year 5
Total
Amount to be invested
Net present value
2.
0%
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[Key essay answer here]
Present Value of
Net Cash Flow
Net Cash Flow
=
Net Present Value Analysis
Problem 25(10)-1B
Name:
Section:
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1. a.
Average annual rate of return for both projects:
$172,000 5
$368,000 2
1. b.
Present
Value of Tracking Tracking
$1 at 15% Warehouse Technology Warehouse Technology
Year 1 0.870 135,000$ 108,000$ 117,450$ 93,960$
Year 2 0.756 125,000 108,000 94,500 81,648
2.
Net Cash Flow
Net Cash Flow
The report to the capital investment committee can take many forms. The report should, as a minimum,
present the following points:
a. Both projects offer the same average annual rate of return.
Problem 25(10)-1B
Name:
Solution
Section:
ON
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Present Value of
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=
18.7%
Net Present Value Analysis
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Fill out the table in 1a completely, even after the payback period is reached.
1. a.
Initial investment:
Net Cash Cumulative Net Net Cash Cumulative Net
Flow Cash Flows Flow Cash Flows
Year 1
Year 2
Year 3
Year 4
Year 5
The Plant Expansion project achieves payback in
The Retail Store Expansion project achieves payback in
expansion project is recommended, based on the cash payback period.
1. b.
Present
Value of
Plant Retail Store Plant Retail Store
$1 at 15% Expansion Expansion Expansion Expansion
Year 1
Year 2
Year 3
Year 4
Year 5
Total
Amount to be invested
Net present value
expansion project is recommended, based on its higher net present value.
2.
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Net Cash Flow
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Net Cash Flow
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Problem 25(10)-2A
Name:
Section:
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Present Value of
Plant Expansion
Retail Store Expansion
Net Present Value Analysis
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Fill out the table in 1a completely, even after the payback period is reached.
1. a.
Initial investment:
Net Cash Cumulative Net Net Cash Cumulative Net
Flow Cash Flows Flow Cash Flows
Year 1 450,000$ 450,000$ 500,000$ 500,000$
Year 2 450,000 900,000 400,000 900,000
1. b.
Present
Value of Plant Retail Store Plant Retail Store
$1 at 15% Expansion Expansion Expansion Expansion
Year 1 0.870 450,000$ 500,000$ 391,500$ 435,000$
Year 2 0.756 450,000 400,000 340,200 302,400
Year 3 0.658 340,000 350,000 223,720 230,300
2.
The report can take many forms and should include, as a minimum, the following points:
a. Both projects offer the same total net cash flow.
$900,000
Net Cash Flow
Net Cash Flow
Present Value of
Net Present Value Analysis
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Plant Expansion
Retail Store Expansion
Problem 25(10)-2A
Name:
Solution
Section:
ON
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Fill out the table in 1a completely, even after the payback period is reached.
1. a.
Initial investment:
Net Cash Cumulative Net Net Cash Cumulative Net
Flow Cash Flows Flow Cash Flows
Year 1
Year 2
Year 3
Year 4
Year 5
The Sound Cellar magazine achieves payback in
The Pro Gamer magazine achieves payback in
magazine is recommended, based on the cash payback period.
1. b.
Present
Value of
Sound Pro Sound Pro
$1 at 10% Cellar Gamer Cellar Gamer
Year 1
Year 2
Year 3
Year 4
Year 5
Total
Amount to be invested
Net present value
magazine is recommended, based on its higher net present value.
2.
Sound Cellar
Pro Gamer
Net Present Value Analysis
Net Cash Flow
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Net Cash Flow
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Present Value of
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Problem 25(10)-2B
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Section:
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Fill out the table in 1a completely, even after the payback period is reached.
1. a.
Initial investment:
Net Cash Cumulative Net Net Cash Cumulative Net
Flow Cash Flows Flow Cash Flows
Year 1 65,000$ 65,000$ 70,000$ 70,000$
Year 2 60,000 125,000 55,000 125,000
1. b.
Present
Value of Sound Pro Sound Pro
$1 at 10% Cellar Gamer Cellar Gamer
Year 1 0.909 65,000$ 70,000$ 59,085$ 63,630$
Year 2 0.826 60,000 55,000 49,560 45,430
2.
Pro Gamer
Problem 25(10)-2B
Name:
Solution
Section:
ON
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Sound Cellar
The report can take many forms and should include, as a minimum, the following points:
a. Both products offer the same total net cash flow.
$125,000
Net Cash Flow
Net Cash Flow
Present Value of
Net Present Value Analysis
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1.
Present Value Net Cash Present Value of Net Cash Present Value of Net Cash Present Value of
of $1 at 20% Flow Net Cash Flow Flow Net Cash Flow Flow Net Cash Flow
Year 1
Year 2
Year 3
Total
Amount to be invested
Net present value
2. Present value index:
Total present value of net cash flow
Divided by amount to be invested
Present value index
3.
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Net Present Value Analysis
Computer Network
Score:
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Problem 25(10)-3A
Name:
Section:
[Key essay answer here]
Maintenance Equipment
Ramp Facilities
0%
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1.
Present Value Net Cash Present Value of Net Cash Present Value of Net Cash Present Value of
of $1 at 20% Flow Net Cash Flow Flow Net Cash Flow Flow Net Cash Flow
Year 1 0.833 4,000,000$ 3,332,000$ 12,000,000$ 9,996,000$ 6,000,000$ 4,998,000$
Year 2 0.694 3,500,000 2,429,000 10,000,000 6,940,000 5,000,000 3,470,000
Year 3 0.579 2,500,000 1,447,500 9,000,000 5,211,000 4,000,000 2,316,000
3.
Problem 25(10)-3A
Name:
Solution
Section:
Score:
Computer Network
Net Present Value Analysis
ON
The computer network has the largest present value index. Although ramp facilities has the largest net
Maintenance Equipment
Ramp Facilities
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1.
Present Value Net Cash Present Value of Net Cash Present Value of Net Cash Present Value of
of $1 at 15% Flow Net Cash Flow Flow Net Cash Flow Flow Net Cash Flow
Year 1
Year 2
Year 3
Total
Amount to be invested
Net present value
2. Present value index:
Total present value of net cash flow
Divided by amount to be invested
Present value index
3.
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Problem 25(10)-3B
Name:
Section:
[Key essay answer here]
Branch Office Expansion
Computer System Upgrade
0%
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Net Present Value Analysis
ATM Kiosk Expansion
Score:
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1.
Present Value Net Cash Present Value of Net Cash Present Value of Net Cash Present Value of
of $1 at 15% Flow Net Cash Flow Flow Net Cash Flow Flow Net Cash Flow
Year 1 0.870 200,000$ 174,000$ 190,000$ 165,300$ 275,000$ 239,250$
Year 2 0.756 160,000 120,960 180,000 136,080 250,000 189,000
2. Present value index:
Total present value of net cash flow 400,240$ 413,240$ 592,750$
3.
ATM Kiosk Expansion
Net Present Value Analysis
ON
The computer system upgrade has the largest present value index. Although the ATM kiosk expansion has
the largest net present value, it returns less present value per dollar invested than does the computer system
Branch Office Expansion
Computer System Upgrade
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Problem 25(10)-3B
Name:
Solution
Section:
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Enter a zero in cells you would otherwise leave blank.
1.
Office Expansion:
Annual net cash flow (at the end of each of 6 years)
Present value of an annuity of $1 at 12% for 6 years (Exh. 5)
Present value of annual net cash flows
Less amount to be invested
Net present value
Server Upgrade:
Annual net cash flow (at the end of each of 4 years)
Present value of an annuity of $1 at 12% for 4 years (Exh. 5)
Present value of annual net cash flows
Less amount to be invested
Net present value
2.
Present
Value of Office Server Office Server
$1 at 12% Expansion Upgrade Expansion Upgrade
Year 1
Year 2
Year 3
Year 4
Year 4 (resid. value)
Total
Amount to be invested
Net present value
3.
0%
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Net Present Value Analysis
Present Value of
Net Cash Flow
Net Cash Flow
Net Present Value Analysis
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Problem 25(10)-5A
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Enter a zero in cells you would otherwise leave blank.
1.
Office Expansion:
Annual net cash flow (at the end of each of 6 years) 125,000$
Present value of an annuity of $1 at 12% for 6 years (Exh. 5) 4.111
Server Upgrade:
Annual net cash flow (at the end of each of 4 years) 165,000$
Present value of an annuity of $1 at 12% for 4 years (Exh. 5) 3.037
2.
Present
Value of Office Server Office Server
$1 at 12% Expansion Upgrade Expansion Upgrade
Year 1 0.893 125,000$ 165,000$ 111,625$ 147,345$
Year 2 0.797 125,000 165,000 99,625 131,505
Year 3 0.712 125,000 165,000 89,000 117,480
3.
Present Value of
Net Present Value Analysis
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Net Present Value Analysis
To: Investment Committee
Both projects have a positive net present value. This means that both projects meet our minimum expected
return of 12% and would be acceptable investments. However, if funds are limited and only one of the two
ON
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Net Cash Flow
Net Cash Flow
Problem 25(10)-5A
Name:
Solution
Section:
Score:
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Enter a zero in cells you would otherwise leave blank.
1.
Witchita:
Annual net cash flow (at the end of each of 6 years)
Present value of an annuity of $1 at 20% for 6 years (Exh. 5)
Present value of annual net cash flows
Less amount to be invested
Net present value
Topeka:
Annual net cash flow (at the end of each of 4 years)
Present value of an annuity of $1 at 20% for 4 years (Exh. 5)
Present value of annual net cash flows
Less amount to be invested
Net present value
2.
Present
Value of
$1 at 20% Witchita Topeka Witchita Topeka
Year 1
Year 2
Year 3
Year 4
Year 4 (resid. value)
Total
Amount to be invested
Net present value
3.
Net Cash Flow
Net Cash Flow
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0%
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Net Present Value Analysis
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Present Value of
Net Present Value Analysis
[Key essay answer here]
Problem 25(10)-5B
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Section:
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1.
Witchita:
Annual net cash flow (at the end of each of 6 years) 310,000$
Present value of an annuity of $1 at 20% for 6 years (Exh. 5) 3.326
Topeka:
Annual net cash flow (at the end of each of 4 years) 400,000$
Present value of an annuity of $1 at 20% for 4 years (Exh. 5) 2.589
2.
Present
Value of
$1 at 20% Witchita Topeka Witchita Topeka
Year 1 0.833 310,000$ 400,000$ 258,230$ 333,200$
Year 2 0.694 310,000 400,000 215,140 277,600
3.
Present Value of
Net Present Value Analysis
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Problem 25(10)-5B
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Net Present Value Analysis
To: Investment Committee
Both Witchita and Topeka have a positive net present value. This means that both projects meet our minimum
expected return of 20% and would be acceptable investments. However, if funds are limited and only one of
Net Cash Flow
Net Cash Flow
ON