CHAPTER 9 PROBLEMS

CAPITAL-BUDGETING TECHNIQUES AND PRACTICE

PROBLEM 9-1
IRR CALCULATIONS

A)
Initial outlay 10,000
FV 17,182
Years 8
IRR = 7%
B)
Initial outlay 10,000
FV 48,077
Years 10
IRR = 17%
C)
Initial outlay 10,000
FV 114,943
Years 20
IRR = 13%
D)
Initial outlay 10,000
FV 13,680
Years 3
IRR = 11%

PROBLEM 9-2
IRR CALCULATIONS

A)
Initial outlay 10,000
pymt 1,993
Years 10
IRR = 15%
B)
Initial outlay 10,000
pymt 2,054
Years 20

Page
IRR = 20%
C)
Initial outlay 10,000
pymt 1,193
Years 12
IRR = 6%
D)
Initial outlay 10,000
pymt 2,843
Years 5
IRR = 13%

PROBLEM 9-3
IRR CALCULATIONS

A)
initial outlay (10,000)
1 2,000
2 5,000
3 8,000
IRR = 19%
B)
Initial outlay (10,000)
1 8,000
2 5,000
3 2,000
IRR = 30%
C)
Initial outlay (10,000)
1 2,000
2 2,000
3 2,000
4 2,000
5 2,000
6 5,000
IRR = 11%

PROBLEM 9-4
NPV, PI, AND IRR CALCULATIONS

DATA

Page
Initial outlay 1,950,000
A-T cash flows 450,000
Years 6
ROR 9%
A)
NPV = 68,663.37
B)
PI = 1.04
C)
IRR = 10%

PROBLEM 9-5
PAYBACK PERIOD, NET PRESENT VALUE, PROFITABILITY INDEX, AND INTERNAL RATE OF RETURN

DATA
Initial Outlay 80,000
Expected after tax cash flow 20,000
Years 6
Required rate of return 10%

A) Pay back period 4

Discounted pay back period 5.37

Year Discounted Cash Flow

1 18,182 18,182
2 16,529 34,711
3 15,026 49,737
4 13,660 63,397
5 12,418 75,816
6 11,289 87,105

B) NPV 7,105

C) PI 1.09

D) IRR 13%

PROBLEM 9-6
NET PRESENT VALUE, PROFITABILITY INDEX, AND INTERNAL RATE OF RETURN

DATA

Page
Required rate fo return 12%

Year Project A Project B

0 (50,000) (70,000)
1 12,000 13,000
2 12,000 13,000
3 12,000 13,000
4 12,000 13,000
5 12,000 13,000
6 12,000 13,000

NPV = (663.11) (16,551.70)

PI = 0.99 0.76
IRR = 11.53% 3.18%

PROBLEM 9-7
PAYBACK PERIOD

DATA
Required rate of return 10.00%

Year Project A Project B Project C

0 (1,000) (10,000) (5,000)
1 600 5,000 1,000
2 300 3,000 1,000
3 200 3,000 2,000
4 100 3,000 2,000
5 500 3,000 2,000

Payback period 2.50 2.67 3.50

Year Project A Project B Project C

0 (1,000) (10,000) (5,000)
1 545 4,545 909
2 248 2,479 826
3 150 2,254 1,503
4 68 2,049 1,366
5 310 1,863 1,242

Disc. payback period 3.83 3.35 4.32

Page
PROBLEM 9-8
NPV WITH VARYING REQUIRED RATES OF RETURN

Initial outlay 5,000,000

Cash inflows 1,000,000
Years 8
A)
ROR 9%
NPV = 534,819.11
B)
ROR 11%
NPV = 146,122.76
C)
ROR 13%
NPV = (201,229.71)
D)
ROR 15%
NPV = (512,678.49)

PROBLEM 9-9
INTERNAL RATE OF RETURN

Project A Project B Project C

Initial investment (50,000) (100,000) (450,000)
Year 1 10,000 25,000 200,000
Year 2 15,000 25,000 200,000
Year 3 20,000 25,000 200,000
Year 4 25,000 25,000
Year 5 30,000 25,000

IRR 23% 8% 16%

PROBLEM 9-10
NPV WITH VARYING REQUIRED RATES OF RETURN

Initial outlay 100,000

Cash inflows 18,000
Years 10
A)
ROR 10%
NPV = 10,602.21

Page
B)
ROR 15%
NPV = (9,662.16)
D)
IRR 12%

PROBLEM 9-11
SIZE DISARITY PROBLEMS

Project A Project B
Initial outlay (500) (5,000)
Inflow year 1 700 6,000

required rate of return= 10%

A)
NPVa= 636.36
136.36
NPVb= 5,454.55
454.55

B)
Profitability index:
project a= 1.27
project b= 1.09

C)
IRRa= Err:523
IRRb= Err:523

PROBLEM 9-12
TIME DISPARITY PROBLEM

Project A Project B
Initial outlay (50,000) (50,000)
Inflow year 1 15,625 0
Inflow year 2 15,625 0
Inflow year 3 15,625 0
Inflow year 4 15,625 0
Inflow year 5 15,625 100,000

Page
required rate of return= 10%

A)
Payback period:
Project A= 3.20
Project B= 4.50

B)
NPVa= 59,231.04
9,231.04
NPVb= 62,092.13
12,092.13

C)
IRRa= Err:523
IRRb= Err:523

PROBLEM 9-13
UNEQUAL LIVES PROBLEM

Project A Project B
Initial outlay (20,000) (20,000)
Inflow year 1 12,590 6,625
Inflow year 2 12,590 6,625
Inflow year 3 12,590 6,625
Inflow year 4 6,625
Inflow year 5 6,625
Inflow year 6 6,625
Inflow year 7 6,625
Inflow year 8 6,625
Inflow year 9 6,625

required rate of return= 15%

A)
Payback period:
Project A= 1.59
Project B= 3.02

Page
B)
NPVa= 28,745.80
8,745.80
NPVb= 31,611.74
11,611.74

C)
IRRa= Err:523
IRRb= 30%

E)
Year Cash Flow
0 (20,000)
1 12,590
2 12,590
3 (7,410)
4 12,590
5 12,590
6 (7,410)
7 12,590
8 12,590
9 12,590

NPVa= 60,074.24
(20,000.00)
(13,150.32)
(8,646.55)
60,074.24

Project A's EAA= 3,830.46 n=

Project B's EAA= 2,433.52 n=

PROBLEM 9-14
EQUIVALENT ANNUAL ANNUITY

A)
Project A Project B
Initial outlay (50,000) (50,000)

Page
Inflow year 1 20,000 36,000
Inflow year 2 20,000 36,000
Inflow year 3 20,000 36,000
Inflow year 4 20,000
Inflow year 5 20,000
Inflow year 6 20,000
Inflow year 7 20,000

A B
Required rate of return= 10% 10%
Number of years= 7 3

NPVa= 47,368.38
Project A's EAA= 9,729.73

NPVb= 39,526.67
Project B's EAA= 15,894.26

B)
infinite life A= 97,297.25
infinite life B= 158,942.60

PROBLEM 9-15
CAPITAL RATIONING

Project Cost P.I. PV of future CF

A 4,000,000 1.18 4,720,000
B 3,000,000 1.08 3,240,000
C 5,000,000 1.33 6,650,000
D 6,000,000 1.31 7,860,000
E 4,000,000 1.19 4,760,000
F 6,000,000 1.20 7,200,000
G 4,000,000 1.18 4,720,000

A)
Project Cost NPV
A&B 7,000,000 960,000
A&C 9,000,000 2,370,000
A&D 10,000,000 2,580,000
A&E 8,000,000 1,480,000

Page
A&F 10,000,000 1,920,000
A&G 8,000,000 1,440,000
B&C 8,000,000 1,890,000
B&D 9,000,000 2,100,000
B&E 7,000,000 1,000,000
B&F 9,000,000 1,440,000
B&G 7,000,000 960,000
C&D 11,000,000 3,510,000
C&E 9,000,000 2,410,000
C&F 11,000,000 2,850,000
C&G 9,000,000 2,370,000
D&E 10,000,000 2,620,000
D&F 12,000,000 3,060,000
D&G 10,000,000 2,580,000
E&F 10,000,000 1,960,000
E&G 8,000,000 1,480,000
F&G 10,000,000 1,920,000
A&B&C 12,000,000 2,610,000
A&B&E 11,000,000 1,720,000
A&B&G 11,000,000 1,680,000
A&E&G 12,000,000 2,200,000
B&C&E 12,000,000 2,650,000
B&C&G 12,000,000 2,610,000

COMPREHENSIVE PROBLEM

DATA
Project A Project B
Initial outlay (110,000) (110,000)
Inflow year 1 20,000 40,000
Inflow year 2 30,000 40,000
Inflow year 3 40,000 40,000
Inflow year 4 50,000 40,000
Inflow year 5 70,000 40,000

required rate of return= 12%

C)
payback a= 3.40
payback b= 2.75

E)

Page
NPVa= 31,739.95
NPVb= 34,191.05

G)
PIa= 1.29
PIb= 1.31

J)
IRRa= Err:523
IRRb= Err:523

M)
Project A Project B
Initial outlay (195,000) (1,200,000)
Inflow year 1 240,000 1,650,000
required rate of return= 10%
1)
NPVa= 23,181.82
NPVb= 300,000.00

2)
PIa= 1.12
PIb= 1.25

3)
IRRa= Err:523
IRRb= Err:523

N)
Project A Project B
Initial outlay (100,000) (100,000)
Inflow year 1 32,000 0
Inflow year 2 32,000 0
Inflow year 3 32,000 0
Inflow year 4 32,000 0
Inflow year 5 32,000 200,000
required rate of return= 11%

1)
payback a= 3.13
payback b= 4.50

Page
 2)
NPVa= 18,268.70
NPVb= 18,690.27

3)
IRRa= Err:523
IRRb= Err:523

O)
Project A Project B
Initial outlay (100,000) (100,000)
Inflow year 1 65,000 32,500
Inflow year 2 65,000 32,500
Inflow year 3 65,000 32,500
Inflow year 4 32,500
Inflow year 5 32,500
Inflow year 6 32,500
Inflow year 7 32,500
Inflow year 8 32,500
Inflow year 9 32,500
required rate of return= 14%

1)
payback a= 1.54
payback b= 3.08

2)
NPVa= 50,906.08
NPVb= 60,757.08

3)
IRRa= 42.6%
IRRb= 29.3%

5)
Year Cash Flow
0 (100,000)
1 65,000
2 65,000
3 (35,000)

Page
 4 65,000
5 65,000
6 (35,000)
7 65,000
8 65,000
9 65,000

required rate of return= 14%

NPVa= 321,514.17
(100,000.00)
(67,497.15)
(45,558.65)
108,458.36

Project A's EAA= 21,926.85 n=

Project B's EAA= 12,283.16 n=

Page
RACTICE

-10,000
2,054
2,054

Page
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054
2,054

Page
D INTERNAL RATE OF RETURN

OF RETURN

Page
3
1

9
1

Page
NPV
720,000 A
240,000 B
1,650,000 C
1,860,000 D
760,000 E
1,200,000 F
720,000 G

Page
3
1

9
1

Page