1 Answers to Warm-Up Exercises E10-1. Answer: E10-2. Answer: Payback period The payback period for Project Hydrogen is 4.29 years. The payback period for Project Helium is 5.75 years. Both projects are acceptable because their payback periods are less than Elysian Fields maximum payback period criterion of 6 years. NPV Year Cash Inflow Present Value 1 $400,000 $ 377, , , , , , , , , Total $1,389, NPV $1,389, $1,250,000 $139, Herky Foods should acquire the new wrapping machine.
2 E10-3: Answer: E10-4: Answer: E10-5: Answer: NPV comparison of two projects Project Kelvin Present value of expenses $45,000 Present value of cash inflows 51,542 (PMT $20,000, N 3, I 8, Solve for PV) NPV $ 6,542 Project Thompson Present value of expenses $275,000 Present value of cash inflows 277,373 (PMT $60,000, N 6, I 8, Solve for PV) NPV $ 2,373 Based on NPV analysis, Axis Corporation should choose an overhaul of the existing system. IRR You may use a financial calculator to determine the IRR of each project. Choose the project with the higher IRR. Project T-Shirt PV 15,000, N 4, PMT 8,000 Solve for I IRR 39.08% Project Board Shorts PV 25,000, N 5, PMT 12,000 Solve for I IRR 38.62% Based on IRR analysis, Billabong Tech should choose project T-Shirt. NPV Note: The IRR for Project Terra is 10.68% while that of Project Firma is 10.21%. Furthermore, when the discount rate is zero, the sum of Project Terra s cash flows exceed that of Project Firma. Hence, at any discount rate that produces a positive NPV, Project Terra provides the higher net present value.
3 Solutions to Problems Note to instructor: In most problems involving the IRR calculation, a financial calculator has been used. Answers to NPV-based questions in the first ten problems provide detailed analysis of the present value of individual cash flows. Thereafter, financial calculator worksheet keystrokes are provided. Most students will probably employ calculator functionality to facilitate their problem solution in this chapter and throughout the course. P10-1. Payback period LG 2; Basic a. $42,000 $7,000 6 years b. The company should accept the project, since 6 8. P10-2. Payback comparisons LG 2; Intermediate a. Machine 1: $14,000 $3,000 4 years, 8 months Machine 2: $21,000 $4,000 5 years, 3 months b. Only Machine 1 has a payback faster than 5 years and is acceptable. c. The firm will accept the first machine because the payback period of 4 years, 8 months is less than the 5-year maximum payback required by Nova Products. d. Machine 2 has returns that last 20 years while Machine 1 has only 7 years of returns. Payback cannot consider this difference; it ignores all cash inflows beyond the payback period. In this case, the total cash flow from Machine 1 is $59,000 ($80,000 $21,000) less than Machine 2.
4 P10-3. Choosing between two projects with acceptable payback periods LG 2; Intermediate a. Year Cash Inflows Project A Investment Balance Year Cash Inflows Project B Investment Balance 0 $100,000 0 $100,000 1 $10,000 90, ,000 60, ,000 70, ,000 30, ,000 40, ,000 10, , , , ,000 Both Project A and Project B have payback periods of exactly 4 years. b. Based on the minimum payback acceptance criteria of 4 years set by John Shell, both projects should be accepted. However, since they are mutually exclusive projects, John should accept Project B. c. Project B is preferred over A because the larger cash flows are in the early years of the project. The quicker cash inflows occur, the greater their value. P10-4. Personal finance: Long-term investment decisions, payback period LG 4 a. and b. Year Annual Cash Flow Project A Cumulative Cash Flow Annual Cash Flow Project B Cumulative Cash Flow 0 $(9,000) $(9,000) $(9,000) $(9,000) 1 2,00 (6,800) 1,500 (7,500) 2 2,500 (4,300) 1,500 (6,000) 3 2,500 (1,800) 1,500 (4,500) 4 2,000 3,500 (1,000) 5 1,800 4,000 Total Cash Flow 11,000 12,000 Payback Period 3 1,800/2, years 4 1,000/4, years c. The payback method would select Project A since its payback of 3.9 years is lower than Project B s payback of 4.25 years. d. One weakness of the payback method is that it disregards expected future cash flows as in the case of Project B.
5 P10-5. NPV LG 3; Basic NPV PV n Initial investment a. N 20, I 14%, PMT $2,000 Solve for PV $13, NPV $13, $10,000 NPV $3, Accept project b. N 20, I 14%, PMT $3,000 Solve for PV 19, NPV $19, $25,000 NPV $5, Reject c. N 20, I 14%, PMT $5,000 Solve for PV $33, NPV $33, $30,000 NPV $33, NPV $3,115 Accept P10-6. NPV for varying cost of capital LG 3; Basic a. 10% N 8, I 10%, PMT $5000 Solve for PV $26, NPV PV n Initial investment NPV $26, $24,000 NPV $2, Accept; positive NPV b. 12% N 8, I 12%, PMT $5,000 Solve for PV $24, NPV PV n Initial investment NPV $24, $24,000 NPV $ Accept; positive NPV
6 c. 14% N 8, I 14%, PMT $5,000 Solve for PV $23, NPV PV n Initial investment NPV $23, $24,000 NPV -$ Reject; negative NPV P10-7. NPV independent projects LG 3; Intermediate Project A N 10, I 14%, PMT $4,000 Solve for PV $20, NPV $20, $26,000 NPV $5, Reject Project B PV of Cash Inflows CF 0 -$500,000; CF 1 $100,000; CF 2 $120,000; CF 3 $140,000; CF 4 $160,000; CF 5 $180,000; CF 6 $200,000 Set I 14% Solve for NPV $53, Accept Project C PV of Cash Inflows CF 0 -$170,000; CF 1 $20,000; CF 2 $19,000; CF 3 $18,000; CF 4 $17,000; CF 5 $16,000; CF 6 $15,000; CF 7 $14,000; CF 8 $13,000; CF 9 $12,000; CF 10 $11,000, Set I 14% Solve for NPV -$83, Reject Project D N 8, I 14%, PMT $230,000 Solve for PV $1,066,939 NPV PV n Initial investment NPV $1,066,939 $950,000 NPV $116,939 Accept Project E PV of Cash Inflows CF 0 -$80,000; CF 1 $0; CF 2 $0; CF 3 $0; CF 4 $20,000; CF 5 $30,000; CF 6 $0; CF 7 $50,000; CF 8 $60,000; CF 9 $70,000 Set I 14% Solve for NPV $9, Accept
7 P10-8. NPV LG 3; Challenge a. N 5, I 9%, PMT $385,000 Solve for PV $1,497, The immediate payment of $1,500,000 is not preferred because it has a higher present value than does the annuity. b. N 5, I 9%, PV $1,500,000 Solve for PMT $385, c. Present value Annuity Due PV ordinary annuity (1 discount rate) $1,497, (1.09) $1,632,292 Calculator solution: $1,632,292 Changing the annuity to a beginning-of-the-period annuity due would cause Simes Innovations to prefer to make a $1,500,000 one-time payment because the present value of the annuity due is greater than the $1,500,000 lump-sum option. d. No, the cash flows from the project will not influence the decision on how to fund the project. The investment and financing decisions are separate. P10-9. NPV and maximum return LG 3; Challenge a. N 4, I 10%, PMT $4,000 Solve for PV $12, NPV PV Initial investment NPV $12, $13,000 NPV $ Reject this project due to its negative NPV. b. N 4, PV -$13,000, PMT $4,000 Solve for I 8.86% 8.86% is the maximum required return that the firm could have for the project to be acceptable. Since the firm s required return is 10% the cost of capital is greater than the expected return and the project is rejected. P NPV mutually exclusive projects LG 3; Intermediate a. and b. Press A CF 0 -$85,000; CF 1 $18,000; F1 8 Set I 15% Solve for NPV -$4, Reject
8 Press B CF 0 -$60,000; CF 1 $12,000; CF 2 $14,000; CF 3 $16,000; CF 4 $18,000; CF 5 $20,000; CF 6 $25,000 Set I 15% Solve for NPV $2, Accept Press C CF 0 -$130,000; CF 1 $50,000; CF 2 $30,000; CF 3 $20,000; CF 4 $20,000; CF 5 $20,000; CF 6 $30,000; CF 7 $40,000; CF 8 $50,000 Set I 15% Solve for NPV $15, Accept c. Ranking using NPV as criterion Rank Press NPV 1 C $15, B 2, A 4, d. Profitability Indexes Profitability Index Present Value Cash Inflows Investment Press A: $80,771 $85, Press B: $62,588 $60, Press C: $145,070 $130, e. The profitability index measure indicates that Press C is the best, then Press B, then Press A (which is unacceptable). This is the same ranking as was generated by the NPV rule. P Personal finance: Long-term investment decisions, NPV method LG 3 Key information: Cost of MBA program $100,000 Annual incremental benefit $ 20,000 Time frame (years) 40 Opportunity cost 6.0% Calculator Worksheet Keystrokes: CF 0 100,000 CF 1 20,000 F 1 40 Set I 6% Solve for NPV $200,926 The financial benefits outweigh the cost of the MBA program.
9 P Payback and NPV LG 2, 3; Intermediate a. Project Payback Period A $40,000 $13, years B 3 ($10,000 $16,000) 3.63 years C 2 ($5,000 $13,000) 2.38 years Project C, with the shortest payback period, is preferred. b. Worksheet keystrokes Year Project A Project B Project C 0 $40,000 $40,000 $40, ,000 7,000 19, ,000 10,000 16, ,000 13,000 13, ,000 16,000 10, ,000 19,000 7,000 Solve for NPV $2, $ $5, Accept Reject Accept Project C is preferred using the NPV as a decision criterion. c. At a cost of 16%, Project C has the highest NPV. Because of Project C s cash flow characteristics, high early-year cash inflows, it has the lowest payback period and the highest NPV. P NPV and EVA LG 3; Intermediate a. NPV $2,500,000 $240, $166,667 b. Annual EVA $240,000 ($2,500,000 x 0.09) $15,000 c. Overall EVA $15, $166,667 In this case, NPV and EVA give exactly the same answer.
10 P IRR Mutually exclusive projects LG 4; Intermediate IRR is found by solving: n CFt $0 initial investment t (1 IRR) t 1 Most financial calculators have an IRR key, allowing easy computation of the internal rate of return. The numerical inputs are described below for each project. Project A CF 0 $90,000; CF 1 $20,000; CF 2 $25,000; CF 3 $30,000; CF 4 $35,000; CF 5 $40,000 Solve for IRR 17.43% If the firm s cost of capital is below 17%, the project would be acceptable. Project B CF 0 $490,000; CF 1 $150,000; CF 2 $150,000; CF 3 $150,000; CF 4 $150,000 [or, CF 0 $490,000; CF 1 $150,000, F 1 4] Solve for IRR 8.62% The firm s maximum cost of capital for project acceptability would be 8.62%. Project C CF 0 $20,000; CF 1 $7500; CF 2 $7500; CF 3 $7500; CF 4 $7500; CF 5 $7500 [or, CF 0 $20,000; CF 1 $7500; F 1 5] Solve for IRR 25.41% The firm s maximum cost of capital for project acceptability would be 25.41%. Project D CF 0 $240,000; CF 1 $120,000; CF 2 $100,000; CF 3 $80,000; CF 4 $60,000 Solve for IRR 21.16% The firm s maximum cost of capital for project acceptability would be 21% (21.16%). P IRR Mutually exclusive projects LG 4; Intermediate a. and b. Project X $100,000 $120,000 $150,000 $190,000 $250,000 $0 $500, (1 IRR) (1 IRR) (1 IRR) (1 IRR) (1 IRR) CF 0 -$500,000; CF 1 $100,000; CF 2 $120,000; CF 3 $150,000; CF 4 $190,000 CF 5 $250,000 Solve for IRR 15.67; since IRR cost of capital, accept. Project Y $140,000 $120,000 $95,000 $70,000 $50,000 $0 $325, (1 IRR) (1 IRR) (1 IRR) (1 IRR) (1 IRR)
11 CF 0 $325,000; CF 1 $140,000; CF 2 $120,000; CF 3 $95,000; CF 4 $70,000 CF 5 $50,000 Solve for IRR 17.29%; since IRR cost of capital, accept. c. Project Y, with the higher IRR, is preferred, although both are acceptable. P Personal Finance: Long-term investment decisions, IRR method LG 4; Intermediate IRR is the rate of return at which NPV equals zero Computer inputs and output: N 5, PV $25,000, PMT $6,000 Solve for IRR 6.40% Required rate of return: 7.5% Decision: Reject investment opportunity P IRR, investment life, and cash inflows LG 4; Challenge a. N 10, PV -$61,450, PMT $10,000 Solve for I 10.0% The IRR cost of capital; reject the project. b. I 15%, PV $61,450, PMT $10,000 Solve for N years The project would have to run a little over 8 more years to make the project acceptable with the 15% cost of capital. c. N 10, I 15%, PV $61,450 Solve for PMT $12, P NPV and IRR LG 3, 4; Intermediate a. N 7, I 10%, PMT $4,000 Solve for PV $19, NPV PV Initial investment NPV $19,472 $18,250 NPV $1, b. N 7, PV $18,250, PMT $4,000 Solve for I 12.01% c. The project should be accepted since the NPV 0 and the IRR the cost of capital.
12 P NPV, with rankings LG 3, 4; Intermediate a. NPV A $45, (N 3, I 15, PMT $20,000) $50,000 NPV A -$4, Or, using NPV keystrokes CF 0 $50,000; CF 1 $20,000; CF 2 $20,000; CF 3 $20,000 Set I 15% NPV A $4, Reject b. NPV B Key strokes CF 0 $100,000; CF 1 $35,000; CF 2 $50,000; CF 3 $50,000 Set I 15% Solve for NPV $1, Accept NPV C Key strokes CF 0 $80,000; CF 1 $20,000; CF 2 $40,000; CF 3 $60,000 Set I 15% Solve for NPV $7, Accept NPV D Key strokes CF 0 $180,000; CF 1 $100,000; CF 2 $80,000; CF 3 $60,000 Set I 15% Solve for NPV $6, Accept Rank Press NPV 1 C $7, D 6, B 1, A c. Using the calculator, the IRRs of the projects are: Project IRR A B 9.70% 15.63% C 19.44% D 17.51% Since the lowest IRR is 9.7%, all of the projects would be acceptable if the cost of capital was 9.7%. Note: Since Project A was the only rejected project from the four projects, all that was needed to find the minimum acceptable cost of capital was to find the IRR of A.
13 P All techniques, conflicting rankings LG 2, 3, 4: Intermediate a. Year Project A Cash Inflows Investment Balance Year Project B Cash Inflows Investment Balance 0 $150,000 0 $150,000 1 $45, ,000 1 $75,000 75, ,000 60, ,000 15, ,000 15, ,000 15, ,000 30, , ,000 30, ,000 30,000 $150,000 Payback A 3.33 years 3 years 4 months $45,000 $15,000 Payback B 2 years years 2.5 years 2 years 6 months $30,000 b. At a discount rate of zero, dollars have the same value through time and all that is needed is a summation of the cash flows across time. NPV A ($45,000 6) - $150,000 $270,000 $150,000 $120,000 NPV B $75,000 $60,000 $120,000 $150,000 $105,000 c. NPV A : CF 0 $150,000; CF 1 $45,000; F 1 6 Set I 9% Solve for NPV A $51, NPV B : CF 0 $150,000; CF 1 $75,000; CF 2 $60,000; CF 3 $120,000 Set I 9% Solve for NPV $51, Accept d. IRR A : CF 0 $150,000; CF 1 $45,000; F 1 6 Solve for IRR 19.91% IRR B : CF 0 $150,000; CF 1 $75,000; CF 2 $60,000; CF 3 $120,000 Solve for IRR 22.71%
14 e. Rank Project Payback NPV IRR A B The project that should be selected is A. The conflict between NPV and IRR is due partially to the reinvestment rate assumption. The assumed reinvestment rate of Project B is 22.71%, the project s IRR. The reinvestment rate assumption of A is 9%, the firm s cost of capital. On a practical level Project B may be selected due to management s preference for making decisions based on percentage returns and their desire to receive a return of cash quickly. P Payback, NPV, and IRR LG 2, 3, 4; Intermediate a. Payback period Balance after 3 years: $95,000 $20,000 $25,000 $30,000 $20,000 3 ($20,000 $35,000) 3.57 years b. NPV computation CF 0 $95,000; CF 1 $20,000; CF 2 $25,000; CF 3 $30,000; CF 4 $35,000 CF 5 $40,000 Set I 12% Solve for NPV $9, c. $20,000 $25,000 $30,000 $35,000 $40,000 $0 $95, (1 IRR) (1 IRR) (1 IRR) (1 IRR) (1 IRR) CF 0 $95,000; CF 1 $20,000; CF 2 $25,000; CF 3 $30,000; CF 4 $35,000 CF 5 $40,000 Solve for IRR 15.36% d. NPV $9,080; since NPV 0; accept IRR 15%; since IRR 12% cost of capital; accept The project should be implemented since it meets the decision criteria for both NPV and IRR. P NPV, IRR, and NPV profiles LG 3, 4, 5; Challenge a. and b. Project A CF 0 $130,000; CF 1 $25,000; CF 2 $35,000; CF 3 $45,000 CF 4 $50,000; CF 5 $55,000 Set I 12% NPV A $15, Based on the NPV the project is acceptable since the NPV is greater than zero. Solve for IRR A 16.06%
15 Based on the IRR the project is acceptable since the IRR of 16% is greater than the 12% cost of capital.
16 c. Project B CF 0 $85,000; CF 1 $40,000; CF 2 $35,000; CF 3 $30,000 CF 4 $10,000; CF 5 $5,000 Set I 12% NPV B $9, Based on the NPV the project is acceptable since the NPV is greater than zero. Solve for IRR B 17.75% Based on the IRR the project is acceptable since the IRR of 17.75% is greater than the 12% cost of capital. Data for NPV Profiles NPV Discount Rate A B 0% $80,000 $35,000 12% $15,238 $9,161 15% $ 4,177 16% 0 18% 0 d. The net present value profile indicates that there are conflicting rankings at a discount rate less than the intersection point of the two profiles (approximately 15%). The conflict in rankings is caused by the relative cash flow pattern of the two projects. At discount rates above approximately 15%, Project B is preferable; below approximately 15%, Project A is better. Based on Thomas Company s 12% cost of capital, Project A should be chosen. e. Project A has an increasing cash flow from Year 1 through Year 5, whereas Project B has a decreasing cash flow from Year 1 through Year 5. Cash flows moving in opposite directions often cause conflicting rankings. The IRR method reinvests Project B s larger early cash flows at the higher IRR rate, not the 12% cost of capital.
17 P All techniques decision among mutually exclusive investments LG 2, 3, 4, 5, 6; Challenge Project A B C Cash inflows (years 1 5) $20,000 $ 31,500 $ 32,500 a. Payback * 3 years 3.2 years 3.4 years b. NPV * $10,345 $ 10,793 $ 4,310 c. IRR * 19.86% 17.33% 14.59% * Supporting calculations shown below: a. Payback Period: Project A: $60,000 $20,000 3 years Project B: $100,000 $31, years Project C: $110,000 $32, years b. NPV Project A CF 0 $60,000; CF 1 $20,000; F 1 5 Set I 13% Solve for NPV A $10, Project B CF 0 $100,000; CF 1 $31,500; F 1 5 Set I 13% Solve for NPV B $10, Project C CF 0 $110,000; CF 1 $32,500; F 1 5 Set I 13% Solve for NPV C $4, c. IRR Project A CF 0 $60,000; CF 1 $20,000; F 1 5 Solve for IRR A 19.86% Project B CF 0 $100,000; CF 1 $31,500; F 1 5 Solve for IRR B 17.34% Project C CF 0 $110,000; CF 1 $32,500; F 1 5 Solve for IRR C 14.59%
18 d. Data for NPV Profiles NPV Discount Rate A B C 0% $40,000 $57,500 $52,500 13% $10,340 10,793 4,310 15% 0 17% 0 20% 0 The difference in the magnitude of the cash flow for each project causes the NPV to compare favorably or unfavorably, depending on the discount rate. e. Even though A ranks higher in Payback and IRR, financial theorists would argue that B is superior since it has the highest NPV. Adopting B adds $ more to the value of the firm than does adopting A. P All techniques with NPV profile mutually exclusive projects LG 2, 3, 4, 5, 6; Challenge a. Project A Payback period Year 1 Year 2 Year 3 $60,000 Year 4 $20,000 Initial investment $80,000 Payback 3 years ($20,000 30,000) Payback 3.67 years
19 Project B Payback period $50,000 $15, years b. Project A CF 0 $80,000; CF 1 $15,000; CF 2 $20,000; CF 3 $25,000; CF 4 $30,000; CF 5 $35,000 Set I 13% Solve for NPV A $3, Project B CF 0 $50,000; CF 1 $15,000; F 1 5 Set I 13% Solve for NPV B $2, c. Project A CF 0 $80,000; CF 1 $15,000; CF 2 $20,000; CF 3 $25,000; CF 4 $30,000; CF 5 $35,000 Solve for IRR A 14.61% Project B CF 0 $50,000; CF 1 $15,000; F 1 5 Solve for IRR B 15.24% d.
20 Data for NPV Profiles NPV Discount Rate A B 0% $45,000 $25,000 13% $3,655 2, % % 0 Intersection approximately 14% If cost of capital is above 14%, conflicting rankings occur. The calculator solution is 13.87%. e. Both projects are acceptable. Both have similar payback periods, positive NPVs, and equivalent IRRs that are greater than the cost of capital. Although Project B has a slightly higher IRR, the rates are very close. Since Project A has a higher NPV, accept Project A. P Integrative Multiple IRRs LG 6; Basic a. First the project does not have an initial cash outflow. It has an inflow, so the payback is immediate. However, there are cash outflows in later years. After 2 years, the project s outflows are greater than its inflows, but that reverses in year 3. The oscillating cash flows (positive-negative-positive-negative-positive) make it difficult to even think about how the payback period should be defined. b. CF 0 $200,000, CF 1 920,000, CF 2 $1,592,000, CF 3 $1,205,200, CF 4 $343,200 Set I 0%; Solve for NPV $0.00 Set I 5%; Solve for NPV $15.43 Set I 10%; Solve for NPV $0.00 Set I 15%; Solve for NPV $6.43 Set I 20%; Solve for NPV $0.00 Set I 25%; Solve for NPV $7.68 Set I 30%; Solve for NPV $0.00 Set I 35%, Solve for NPV $39.51 c. There are multiple IRRs because there are several discount rates at which the NPV is zero. d. It would be difficult to use the IRR approach to answer this question because it is not clear which IRR should be compared to each cost of capital. For instance, at 5%, the NPV is negative, so the project would be rejected. However, at a higher 15% discount rate the NPV is positive and the project would be accepted. e. It is best simply to use NPV in a case where there are multiple IRRs due to the changing signs of the cash flows.
21 P Integrative Conflicting Rankings LG 3, 4, 5; Intermediate a. Plant Expansion b. CF 0 $3,500,000, CF 1 1,500,000, CF 2 $2,000,000, CF 3 $2,500,000, CF 4 $2,750,000 Set I 20%; Solve for NPV $1,911, Solve for IRR 43.70% CF 1 1,500,000, CF 2 $2,000,000, CF 3 $2,500,000, CF 4 $2,750,000 Set I 20%; Solve for NPV $5,411, (This is the PV of the cash inflows) PI $5,411, $3,500, Product Introduction CF 0 $500,000, CF 1 250,000, CF 2 $350,000, CF 3 $375,000, CF 4 $425,000 Set I 20%; Solve for NPV $373, Solve for IRR 52.33% CF 1 250,000, CF 2 $350,000, CF 3 $375,000, CF 4 $425,000 Set I 20%; Solve for NPV $873, (This is the PV of the cash inflows) PI $873, $500, Rank Project NPV IRR PI Plant Expansion Product Introduction c. The NPV is higher for the plant expansion, but both the IRR and the PI are higher for the product introduction project. The rankings do not agree because the plant expansion has a much larger scale. The NPV recognizes that it is better to accept a lower return on a larger project here. The IRR and PI methods simply measure the rate of return on the project and not its scale (and therefore not how much money in total the firm makes from each project). d. Because the NPV of the plant expansion project is higher, the firm s shareholders would be better off if the firm pursued that project, even though it has a lower rate of return. P Ethics problem LG 1, 6; Intermediate Expenses are almost sure to increase for Gap. The stock price would almost surely decline in the immediate future, as cash expenses rise relative to cash revenues. In the long run, Gap may be able to attract and retain better employees (as does Chick-fil-A, interestingly enough, by being closed on Sundays), new human rights and environmentally conscious customers, and new investor demand from the burgeoning socially responsible investing mutual funds. This long-run effect is not assured, and we are again reminded that it s not merely shareholder wealth maximization we re after but maximizing shareholder wealth subject to ethical constraints. In fact, if Gap was unwilling to renegotiate worker conditions, Calvert Group (and others) might sell Gap shares and thereby decrease shareholder wealth.
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T9.1 Chapter Outline Chapter 9 Net Present Value and Other Investment Criteria Chapter Organization! 9.1 Net Present Value! 9.2 The Payback Rule! 9.3 The Average Accounting Return! 9.4 The Internal Rate
NPV Versus IRR W.L. Silber I. Our favorite project A has the following cash flows: -1 + +6 +9 1 2 We know that if the cost of capital is 18 percent we reject the project because the net present value is
CALCULATOR TUTORIAL INTRODUCTION Because most students that use Understanding Healthcare Financial Management will be conducting time value analyses on spreadsheets, most of the text discussion focuses
Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual
Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded
INDUSTRIAL UNIVERSITY OF HO CHI MINH CITY AUDITING ACCOUNTING FACULTY 10.SHORT-TERM DECISIONS & CAPITAL INVESTMENT APPRAISAL 4 Topic List INDUSTRIAL UNIVERSITY OF HO CHI MINH CITY AUDITING ACCOUNTING FACULTY
Solutions to Problems: Chapter 5 P5-1. Using a time line LG 1; Basic a, b, and c d. Financial managers rely more on present value than future value because they typically make decisions before the start
Strategies and Mechanisms For Promoting Cleaner Production Investments In Developing Countries Profiting From Cleaner Production Performing Net Present Value (NPV) Calculations Cleaner Production Profiting
CHAPTER 7: NPV AND CAPITAL BUDGETING I. Introduction Assigned problems are 3, 7, 34, 36, and 41. Read Appendix A. The key to analyzing a new project is to think incrementally. We calculate the incremental
CHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will
21-18 Capital budgeting methods, no income taxes. The table for the present value of annuities (Appendix A, Table 4) shows: 10 periods at 14% 5.216 1a. Net present value $28,000 (5.216) $146,048 $36,048
CHAPTER 9 Capital Budgeting Meaning The term Capital Budgeting refers to the long-term planning for proposed capital outlays or expenditure for the purpose of maximizing return on investments. The capital
Vol. 2, Chapter 4 Capital Budgeting Problem 1: Solution Answers found using Excel formulas: 1. Amount invested = $10,000 $21,589.25 Compounding period = annually Number of years = 10 Annual interest rate
Chapter 9 Capital Budgeting Decision Models LEARNING OBJECTIVES (Slide 9-2) 1. Explain capital budgeting and differentiate between short-term and long-term budgeting decisions. 2. Explain the payback model
CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project
BUSINESS FINANCE (FIN 31) Spring 009 Assignment Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how to
CHAPTER 4 DISCOUNTED CASH FLOW VALUATION 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
Which projects should the corporation undertake Investment criteria 1. Investment into a new project generates a flow of cash and, therefore, a standard DPV rule should be the first choice under consideration.
Corporation Finance Spring 2012 Sample Exam 2B True/False Indicate whether the statement is true or false. 1. The total return on a share of stock refers to the dividend yield less any commissions paid
HO-23: METHODS OF INVESTMENT APPRAISAL After completing this exercise you will be able to: Calculate and compare the different returns on an investment using the ROI, NPV, IRR functions. Investments: Discounting,
12-1 Planning for Capital Investments Managerial Accounting Fifth Edition Weygandt Kimmel Kieso 12-2 study objectives 1. Discuss capital budgeting evaluation, and explain inputs used in capital budgeting.
Chapter 4 Discounted Cash Flow Valuation 4B-1 Appendix 4B Using Financial Calculators This appendix is intended to help you use your Hewlett-Packard or Texas Instruments BA II Plus financial calculator
Capital Budgeting: Net Present Value vs Internal Rate of Return (Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics) Y O Lam Capital budgeting assists decision makers in a
MBA Teaching Note 08-02 Net Present Value Analysis of the Purchase of a Hybrid Automobile 1 In this day and age of high energy prices and a desire to be more environmentally friendly, the automobile industry
Answers to Warm-Up Exercises E11-1. Categorizing a firm s expenditures Answer: In this case, the tuition reimbursement should be categorized as a capital expenditure since the outlay of funds is expected
Integrated Case 5-42 First National Bank Time Value of Money Analysis You have applied for a job with a local bank. As part of its evaluation process, you must take an examination on time value of money
Chapter 1: Introduction 1.1 Introduction Every long term decision the firm makes is a capital budgeting decision whenever it changes the company s cash flows. Consider launching a new product. This involves
Investments What you must be able to explain: Future value Present value Annual effective interest rate Net present value (NPV ) and opportunity cost of capital Internal rate of return (IRR) Payback rule
Lease Analysis Tools 2009 ELFA Lease Accountants Conference Presenter: Bill Bosco, Pres. firstname.lastname@example.org Leasing 101 914-522-3233 Overview Math of Finance Theory Glossary of terms Common calculations
BENEFIT-COST ANALYSIS Financial and Economic Appraisal using Spreadsheets Ch. 3: Decision Rules Harry Campbell & Richard Brown School of Economics The University of Queensland Applied Investment Appraisal
Chapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 11-1 a. Cash flow, which is the relevant financial variable, represents the actual flow of cash. Accounting
Chapter 22 Real Options Multiple Choice Questions 1. The following are the main types of real options: (I) The option to expand if the immediate investment project succeeds (II) The option to wait (and
Introduction to Discounted Cash Flow and Project Appraisal Charles Ward Company investment decisions How firms makes investment decisions about real projects (not necessarily property) How to decide which
In Excel language, if the initial cash flow is an inflow (positive), then the future value must be an outflow (negative). Therefore you must add a negative sign before the FV (and PV) function. The inputs
Exercise 1 for Time Value of Money MULTIPLE CHOICE 1. Which of the following statements is CORRECT? a. A time line is not meaningful unless all cash flows occur annually. b. Time lines are useful for visualizing
Full Marks : 70 MBA/29/FM-302/T/ODD/13-14 2013-14 MBA (3rd Sem) Paper Name : Corporate Finance Paper Code : FM-302 Time : 3 Hours The figures in the right-hand margin indicate marks. Candidates are required
Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas
Training Module SPEAKER S NOTES FINANCIAL AND RISK ANALYSIS WITH RETSCREEN SOFTWARE CLEAN ENERGY PROJECT ANALYSIS COURSE This document provides a transcription of the oral presentation (Voice & Slides)
Learning Objectives 1-1 Capital Budgeting Cash Flows 1 Corporate Financial Management 3e Emery Finnerty Stowe 1-2 Calculate incremental after-tax cash flows for a capital budgeting project. Explain the
Chapter 1 The Overall Process Capital Expenditures Whenever we make an expenditure that generates a cash flow benefit for more than one year, this is a capital expenditure. Examples include the purchase
6 Investment Decisions After studying this chapter you will be able to: Learning Objectives Define capital budgeting and explain the purpose and process of Capital Budgeting for any business. Explain the
Chapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO END-OF-CHAPTER QUESTIONS 11-1 a. Cash flow, which is the relevant financial variable, represents the actual flow of cash. Accounting income,
Solutions to Chapter 9 Using Discounted Cash-Flow Analysis to Make Investment Decisions 1. Net income = ($74 $42 $10) [0.35 ($74 $42 $10)] = $22 $7.7 = $14.3 million Revenues cash expenses taxes paid =
1 Global Financial Management Valuation of Cash Flows Investment Decisions and Capital Budgeting Copyright 1999 by Alon Brav, Campbell R. Harvey, Stephen Gray and Ernst Maug. All rights reserved. No part
UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Calculator (Hewlett-Packard 10BII) Tutorial To begin, look at the face of the calculator. Most keys (except a few) have two functions: Each key s primary function
Texas Instruments BAII PLUS Calculator Tutorial to accompany Cyr, et. al. Contemporary Financial Management, 1 st Canadian Edition, 2004 Version #6, May 5, 2004 By William F. Rentz and Alfred L. Kahl Introduction
ANSWERS TO STUDY QUESTIONS Chapter 17 17.1. The details are described in section 17.1.1. 17.3. Because of its declining payment pattern, a CAM would be most useful in an economy with persistent deflation
Decision making made easy (Relevant to AAT Examination Paper 4: Business Economics and Financial Mathematics) YO Lam, SCOPE, City University of Hong Kong In the competitive world of business, we need to
The Time Value of Money Future Value - Amount to which an investment will grow after earning interest. Compound Interest - Interest earned on interest. Simple Interest - Interest earned only on the original
18 CAPITAL INVESTMENT (Contributed by Deryl Northcott) Introduction Capital Investment Defined Who is Involved in Making CI Decisions? Why Are Capital Investment Decisions Important? Types of Capital Investments
RELEVANT TO ACCA QUALIFICATION PAPER F9 Studying Paper F9? Performance objectives 15 and 16 are relevant to this exam Investment appraisal is one of the eight core topics within Paper F9, Financial Management
Chapter 02 How to Calculate Present Values Multiple Choice Questions 1. The present value of $100 expected in two years from today at a discount rate of 6% is: A. $116.64 B. $108.00 C. $100.00 D. $89.00
CHAPTER 10: UNCERTAINTY AND RISK IN CAPITAL BUDGETING: PART I 10-1 Year ATCF 0-2,500,000 Initial Investment = $2,500,000 1 $1,280,000 Annual Operating Cash Flows 2 $1,280,000 Revenues $5,000,000 3 $1,280,000
MBA 8130 FOUNDATIONS OF CORPORATION FINANCE FINAL EXAM VERSION A Fall Semester 2004 Name: Class: Day/Time/Instructor:. Read the following directions very carefully. Failure to follow these directions will
apital Budgeting Formula Not in the book. Wei s summary If salvage value S is less than U n : If salvage value S is greater than U n : Note: IF t : incremental cash flows (could be negative) )(NW): change