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CHAPTER 9
NET PRESENT VALUE AND OTHER
INVESTMENT CRITERIA
Answers to Concepts Review and Critical Thinking Questions
1. A payback period less than the project’s life means that the NPV is positive for a zero discount rate,
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5. a. The average accounting return is interpreted as an average measure of the accounting
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9. For a project with future cash flows that are an annuity:
10. There are a number of reasons. Two of the most important have to do with transportation costs and
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13. The MIRR is calculated by finding the present value of all cash outflows, the future value of all cash
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Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple
steps. Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
Basic
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4. When we use discounted payback, we need to find the value of all cash flows today. The value today
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8. The NPV of a project is the PV of the inflows minus the PV of the outflows. The equation for the NPV
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10. The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines
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12. a. The IRR is the interest rate that makes the NPV of the project equal to zero. The equation for the IRR
c. To find the crossover rate, we subtract the cash flows from one project from the cash flows of the
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13. The IRR is the interest rate that makes the NPV of the project equal to zero. The equation to calculate
The table below shows the NPV of each project for different required returns. Notice that Project X
14. a. The equation for the NPV of the project is:
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b. The equation for the IRR of the project is:
15. The profitability index is defined as the PV of the cash inflows divided by the initial investment. The
16. a. The profitability index is the PV of the future cash flows divided by the initial investment. The
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17. a. The payback period for each project is:
c. The NPV for each project is:
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18. At a zero discount rate (and only at a zero discount rate), the cash flows can be added together across
