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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 26-1A
Name:
Section:
0%
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Instructions
=
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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 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
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.
Problem 26-1A
Name:
Solution
Section:
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.
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[Key essay answer here]
Present Value of
Net Cash Flow
Net Cash Flow
=
Net Present Value Analysis
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Score:
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Instructions
Problem 26-1B
Name:
Section:
0%
[Key code here]
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1. a.
Average annual rate of return for both projects:
1. b.
Present
Value of Tracking Tracking
$1 at 15% Warehouse Technology Warehouse Technology
Year 1 0.870 135,000$ 108,000$ 117,450$ 93,960$
Year 2 0.756 125,000 108,000 94,500 81,648
2.
The report to the capital investment committee can take many forms. The report should, as a minimum,
present the following points:
Problem 26-1B
Name:
Solution
Section:
ON
Net Present Value Analysis
Net Cash Flow
Net Cash Flow
Present Value of
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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
$1 at 15% Expansion Expansion Expansion Expansion
Year 1
Year 2
Year 3
Year 4
Year 5
Total
Amount to be invested
Net present value
expansion project is recommended, based on its higher net present value.
2.
[Key essay answer here]
Problem 26-2A
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Section:
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Net Cash Flow
Instructions
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Present Value of
Plant Expansion
Retail Store Expansion
Net Present Value Analysis
Net Cash Flow
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Fill out the table in 1a completely, even after the payback period is reached.
1. a.
Initial investment:
Net Cash Cumulative Net Net Cash Cumulative Net
Flow Cash Flows Flow Cash Flows
Year 1 450,000$ 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
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
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Problem 26-2A
Name:
Solution
Section:
ON
Plant Expansion
Retail Store Expansion
Net Cash Flow
Net Cash Flow
Present Value of
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 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
$1 at 10% Cellar Gamer Cellar Gamer
Year 1
Year 2
Year 3
Year 4
Year 5
Total
Amount to be invested
Net present value
magazine is recommended, based on its higher net present value.
2.
[Key essay answer here]
Problem 26-2B
Name:
Section:
0%
Score:
Present Value of
Sound Cellar
Pro Gamer
Key Code:
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Net Cash Flow
Instructions
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Net Cash Flow
Net Present Value Analysis
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Fill out the table in 1a completely, even after the payback period is reached.
1. a.
Initial investment:
Net Cash Cumulative Net Net Cash Cumulative Net
Flow Cash Flows Flow Cash Flows
Year 1 65,000$ 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
Year 3 0.751 25,000 35,000 18,775 26,285
2.
Problem 26-2B
Name:
Solution
Section:
Score:
Instructions
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Sound Cellar
Pro Gamer
ON
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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.
b. Both products offer the same cash payback period.
$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.
[Key essay answer here]
Maintenance Equipment
Ramp Facilities
0%
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Net Present Value Analysis
Computer Network
Score:
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Problem 26-3A
Name:
Section:
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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
3.
The computer network has the largest present value index. Although ramp facilities has the largest net
present value, it returns less present value per dollar invested than does the computer network, as revealed
Maintenance Equipment
Ramp Facilities
Problem 26-3A
Name:
Solution
Section:
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Computer Network
Net Present Value Analysis
ON
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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.
[Key essay answer here]
Branch Office Expansion
Computer System Upgrade
0%
Problem 26-3B
Name:
Section:
[Key code here]
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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
3.
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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Score:
ATM Kiosk Expansion
Net Present Value Analysis
ON
Problem 26-3B
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
$1 at 12% Expansion Upgrade Expansion Upgrade
Year 1
Year 2
Year 3
Year 4
Year 4 (resid. value)
Total
Amount to be invested
Net present value
3.
Score:
Key Code:
Instructions
Net Present Value Analysis
Present Value of
Net Cash Flow
Net Cash Flow
Net Present Value Analysis
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[Key essay answer here]
Problem 26-5A
Name:
Section:
0%
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Enter a zero in cells you would otherwise leave blank.
1.
Office Expansion:
Annual net cash flow (at the end of each of 6 years) 125,000$
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 $1 at 12% for 4 years (Exh. 5) 3.037
Present value of annual net cash flows 501,105$
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.
ON
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Net Cash Flow
Net Cash Flow
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
Problem 26-5A
Name:
Solution
Section: