Concept Questions:

Q.1. Payback Period and Net Present Value:

According to information payback period less than a project life states that the payback
less than projects life its NPV could be positive, zero or negative it is based on IRR
discount rate ad if the discount payback is smaller than project life that means the NPV is
positive.
Q.2. Net Present Value:
Positive NPV means the payback period is less than the project life and if the discount
payback is calculated same as discount rate with positive NPV therefore payback period
is less than the project life. With positive NPV means the future cash flow is greater than
the initial investment.
Q.6. Net Present Value:
a. NPV represent that value company has invested in a project and it measures time and
value and it is more beneficial to accept a project with positive NPV.
b. in order to measure NPV is estimating discount sale and cash flow and this method is
a superior among other methods for evaluating however it depends on estimated
numbers rather than fixed numbers.
Q.7. Internal Rate of Return:
a. IRR shows net present of the cash flow and it is a financial break even rate of return.
With greater IRR than discount rate means that the company n=must accept the project
with positive IRR rate.
b. Relationship between NPV and IRR is interchangeable and IRR makes NPV projects
cash flow equal to zero. IRR is more favorable method for companies to accept or reject a
project.
c. IRR is a simpler way for single-period project and most companies use this method
along NPV. However, IRR has been used in situation that is harder to predict an exact
discount rate.
Q.12. Capital Budgeting in Not-for Profit Entities
This entities should capital budgeting decision effectively and government can use this
methods to estimate nd balance its budget and the benefits.
Q.14. Net Profit Value:
It is incorrect. NPV is used in situations that is only single future value of intial
investment and NPV is calculated of all the cash flows close to end of project with
required return.
Q.15. Internal Rate of Return:
The claim is incorrect. The result would be same if IRR method calculated cash flow at
the end of the project or use the one single period.

Questions and Problems:

Q.1. Calculating Payback:
Pay back for 3 years: $1,900 + $2,900 + $2,300 = $7,100
$7,600 - $7,001 = $500
Pay beck for 4 years: 3+ ($500 / $1,700 )= 3.29 years
Q.2. Calculating Payback:
With initial cost of $1,700:
Payback: 2+ ($350 / $675) = 2.52 years
With initial cost of $3,300:
Payback: $3,300 / $675 = 4.89 years
With initial cost of $5,600:
Payback: 8 ($675) = $5,400 with this initial cost the project never
paysback
Q.7. Calculate IRR:
0= - $26,000 + $11,000 / (1 + IRR) + $14,000 / (1 + IRR)2 + $10,000 / (1 + IRR)3
Using excel the estimated percent is 17% therefore its is higher than required return so
the should accept the project.
Q.8. Calculate NPV:
NPV @11%= - $26,000 + $11,000 / 1.11 + $14,000 / 1.112 + $10,000 / 1.113 = $4,301
We can accept the project because the NPV is positive
NPV @24%= - $26,000 + $11,000 / 1.24 + $14,000 / 1.242 + $10,000 / 1.243 = - $2,802
We cannot accept the project because the NPV is negative
Q.10. Calculating NPV:
0= - $13,900 + $6,400 / (1 + IRR) + $8,700 / (1 + IRR)2 + $5,900 / (1 + IRR)3 =
Using excel the estimated percent is 24%
Q.11. Calculating NPV:
NPV @ 0% = - $13,900 + $6,400 + $8,700 + $5,900 = 7,100
NPV @ 10% = - $13,900 + $6,400 / 1.10 + $8,700 / 1.102 + $5,900 / 1.103 = $3,544
NPV @ 20% = - $13,900 + $6,400 / 1.20 + $8,700 / 1.202 + $5,900 / 2.103 = $885
NPV @ 30% = - $13,900 + $6,400 / 1.30 + $8,700 / 1.302 + $5,900 / 1.303 = - $1147
Q.12. NPV vs. IRR:
a. IRR A
0= - $43,500 + $21,400 / (1 + IRR) + $18,500 / (1 + IRR)2 + $13,800 / (1 + IRR)3 +
$7,600 / (1 + IRR)4=
Using excel the estimated percent is 18%
IRR B
0= - $43,500 + $6,400 / (1 + IRR) + $14,700 / (1 + IRR)2 + $22,800 / (1 + IRR)3 +
$25,200 / (1 + IRR)4=

Using excel the estimated percent is 17%

Comparing between project A and project B shows that project A is greater than B
therefore accepting project A is more favorable than B
b. NPVA:
NPV @ 11% = - $43,500 + $21,400 / 1.11 + $18,500 / 1.112 + $13,800 / 1.113 + $7,600 /
1.114 = $5,652
NPV B:
NPV @ 11% = - $43,500 + $6,400 / 1.11 + $14,700 / 1.112 + $22,800 / 1.113 + $25,200 /
1.114 = $7,438
NPV B is greater than A so the project B is acceptable
c. Crossover rate:
0=$15,000 / (1+R) + $3,800 / (1+R)2 $9,000 / (1+R)3 - $17,600 / (1+R)4 =
R=16%