FE-LIKE PROBLEM 6.1
ANSWER: a. $246
rationale: 0 = -$400 + X(P|A 15%,2); X = $246.05
$246.05 =PMT(15%,2,-400)
FE-LIKE PROBLEM 6.2
ANSWER: d. BOTH I AND II
rationale: SINCE THE IRR = MARR, THEN PW EVALUATED AT MARR WILL BE
ZERO. SIMILARLY, THE FW EVALUATED AT MARR WILL BE ZERO.
FE-LIKE PROBLEM 6.3
ANSWER: b. AN INITIAL NEGATIVE CASH FLOW FOLLOWED BY ALL POSITIVE CASH
FLOWS
rationale: DESCARTES’ RULE OF SIGNS AND NORSTROM’S CRITERION
THIS ONLY HOLDS IF AN IRR EXISTS
FE-LIKE PROBLEM 6.4
ANSWER: d. 15%
rationale: PW = -$30 – $15(P|F 15%,1) + 30(P|F 15%,2) + 31(P|F 15%,3) = $0.02;
NO OTHER i% YIELDS A PW CLOSER TO ZERO.
FE-LIKE PROBLEM 6.5
ANSWER: b. 10% TO 12%
rationale: PW = -$15,000 + $2,500(P|A i%,10) AND PW = 0 AT IRR; THEREFORE
(P|A IRR,10) = $15,000/$2,500 = 6.0 WHICH OCCURS BETWEEN 10% AND 12%.
FE-LIKE PROBLEM 6.6
ANSWER: c. THE IRR OF THE INVESTMENT IS GREATER THAN 20%
rationale: THE IRR (POINT E) IS GREATER THAN POINT B, THEREFORE, IF B IS AT
20% THEN THE IRR IS GREATER THAN 20%.
FE-LIKE PROBLEM 6.7
ANSWER: d. POINT E
rationale: THE PW OF THE INVESTMENT REACHES ZERO AT POINT E,
THEREFORE, E IS THE IRR
FE-LIKE PROBLEM 6.8
ANSWER: a. A
rationale: SINCE B HAS THE HIGHER INITIAL COST, THE INCREMENT BEING
EVALUATED IS B – A. SINCE THE IRR OF THE INCREMENT IS LESS THAN MARR,
THE INCREMENT IS REJECTED, THEREFORE, A IS PREFERRED.
FE-LIKE PROBLEM 6.9
ANSWER: d. THE INTERNAL RATE OF RETURN OF THE INCREMENT IS GREATER THAN
MARR
rationale: CONTINUE TO INVEST AS LONG AS THE MARGINIAL RETURN IS GREATER THAN THE MARR
FE-LIKE PROBLEM 6.10
ANSWER: c. NOT ENOUGH INFORMATION IS GIVEN TO DETERMINE WHICH ALTERNATIVE
IS PREFERRED.
rationale: RANKING IS NOT A ACCEPTABLE METHOD FOR IRR ANALYSIS AND
INSUFFICIENT INFORMATION IS PROVIDED TO PERFORM AN INCREMENTAL
ANALYSIS.
FE-LIKE PROBLEM 6.11
ANSWER: d. ORDER THE ALTERNATIVES FROM LOWEST TO HIGHEST INITIAL INVESTMENT
FE-LIKE PROBLEM 6.12
ANSWER: c. ERR HAS ONLY A SINGLE ROOT BUT IRR CAN HAVE MULTIPLE ROOTS
FE-LIKE PROBLEM 6.3
ANSWER: c. MARR
PROBLEM 6.1
a RANKING APPROACH AND INCREMENTAL APPROACH
b INCREMENTAL APPROACH ONLY
c RANKING APPROACH AND INCREMENTAL APPROACH
d INCREMENTAL APPROACH ONLY
e RANKING APPROACH AND INCREMENTAL APPROACH
PROBLEM 6.2
a DOLLARS
b PERCENTAGE
c DOLLARS
d PERCENTAGE
e DOLLARS
PROBLEM 6.3
AN INFINITE NUMBER OF CORRECT RESPONSES ARE POSSIBLE.
THE SIMPLEST FORM FOR THE RESPONSE IS A SINGLE DEPOSIT AND A SINGLE WITHDRAWAL
FOR EXAMPLE
P = $100
F = $100(F|P 10%,4) = $100(1.46410) = $146.41
$146.41
01234
$100
PROBLEM 6.4
SOLUTION USES EXCEL’S GOAL SEEK
EOY CF
0 -$30,000.00
1$6,000.00
2$13,500.00
3$7,447.88
4$13,500.00
IRR 12.00% 12%
CALCULATED TARGET
TO IMPLEMENT GOAL SEEK:
(1) SET CELL: C12 THE CALCULATED IRR VALUE
(2) TO VALUE: MARR VALUE THE TARGET IRR VALUE
(3) BY CHANGING CELL: C9 THE CASH FLOW TO BE DETERMINED
a$7,413.12 RESULTING IRR = 11.96% (12%)
b$10,413.52 RESULTING IRR = 14.99% (15%)
(1) SET TARGET CELL: C12
THE CALCULATED IRR VALUE
(2) EQUAL TO: VALUE OF: MARR VALUE THE TARGET IRR VALUE
(3) BY CHANGING CELLS: C9 THE CASH FLOW TO BE DETERMINED
c$20,346.05 RESULTING IRR = 24.00% (24%)
d$3,713.02 RESULTING IRR = 8.00% (8%)
PROBLEM 6.5
IN K$
EOY CF
0 -$70,000.00
1$20,000.00
2$19,000.00
3$18,000.00
4$17,000.00
5$16,000.00
6$15,000.00
7$14,000.00
8$13,000.00
9$12,000.00
10 $11,000.00
11 $10,000.00
12 $9,000.00
13 $8,000.00
14 $7,000.00
15 $6,000.00
16 $5,000.00
17 $4,000.00
18 $3,000.00
19 $2,000.00
20 $1,000.00
IRR = IRR(CF_COLUMN)
(3) IF IRR >= MARR (20%), THEN ATTRACTIVE; OTHERWISE, UNATTRACTIVE
NU THINGS SHOULD INVEST IN THE BUSINESS VENTURE
PROBLEM 6.6
a SOLUTION USING EXCEL’S IRR FUNCTION
EOY + CF – CF NET CF
0 -$75,000.00 -$75,000.00
1$18,500.00 $18,500.00
2$18,500.00 $18,500.00
3$18,500.00 $18,500.00
4$18,500.00 $18,500.00
5$18,500.00 $18,500.00
IRR = IRR(NET_CF_COLUMN)
IRR = 7.42%
b DECISION RULE
IF IRR > MARR (10%), ACCEPT; OTHERWISE, REJECT
c CARLISLE SHOULD REJECT THE FILTER BASED ON ITS ECONOMIC MERITS
PROBLEM 6.7
THE MAXIMUM AMOUNT THAT FABCO SHOULD BE WILLING TO SPEND IS THE AMOUNT
THE SETS THE IRR TO MARR (7%).
SOLUTION USING EXCEL’S GOAL SEEK
EOY + CF – CF NET CF
0 -$79,426.95 -$79,426.95
1 $10,000.00 $10,000.00
2 $10,000.00 $10,000.00
3 $10,000.00 $10,000.00
4 $10,000.00 $10,000.00
5 $10,000.00 $10,000.00
6 $10,000.00 $10,000.00
7 $10,000.00 $10,000.00
8 $10,000.00 $10,000.00
9 $10,000.00 $10,000.00
10 $10,000.00 $10,000.00
11 $10,000.00 $10,000.00
12 $10,000.00 $10,000.00
IRR 7.00% 7%
CALCULATED TARGET
TO IMPLEMENT GOAL SEEK:
(1) SET CELL: E23 THE CALCULATED IRR VALUE
(2) TO VALUE: MARR VALUE THE TARGET IRR VALUE
(3) BY CHANGING CELL: D9 THE CASH FLOW TO BE DETERMINED
THE MAXIMUM AMOUNT FABCO SHOULD BE WILLING TO PAY IS $79,076.00
SOLUTION USING EXCEL’S SOLVER
TO IMPLEMENT GOAL SEEK:
(1) SET TARGET CELL: E23 THE CALCULATED IRR VALUE
(2) EQUAL TO: VALUE OF: MARR VALUE THE TARGET IRR VALUE
(3) BY CHANGING CELLS: D9 THE CASH FLOW TO BE DETERMINED
THE MAXIMUM AMOUNT FABCO SHOULD BE WILLING TO PAY IS $79,426.95
NOTE:
THE SOLVER SOLUTION IS CONSIDERABLY MORE ACCURATE (AS COMPARED TO
THE PW SOLUTION OF PROBLEM 5.16) THAN THE GOAL SEEK SOLUTION.