Contents
Problem 10-7
Problem 10-10
Problem 10-14
Problem 10-21
Problem 10-23
Problem 10-7
Net present value: Independent projects. Using a 10% cost of capital, calculate the net present
in the following table, and indicate whether each is acceptable.
Cash flows (CFt) in thousands
Year A B C
0 -$250 -$375 -$550
1 50 45 350
2 90 55 210
3 140 65 165
4 80 55 55
5 45 45
6 35 10
7 25
8 15
9 5
10
Valor Presente Neto 29.660 -132.590 136.854
Aceptable No Aceptable Aceptable
pital, calculate the net present value for each of the independent projects shown
Ft) in thousands
D E
-$750 -$1,150
200 80
235 135
250 190
265 255
100 315
50 380
275
100
45
25
85.176 -22.202
Aceptable No Aceptable
Problem 10-10
NPV: Mutually exclusive projects. Hook Industries is considering the replacement of one of its
alternative replacement machines are under consideration. The relevant cash flows associated wi
firm’s cost of capital is 15%.
Machine A Machine B Machine C
Initial investment (CF0) -$85,000 -$60,000 -$130,000
Year (t) Cash inflows (CFt)
1 $18,000 $12,000 $50,000
2 18,000 14,000 30,000
3 18,000 16,000 20,000
4 18,000 18,000 20,000
5 18,000 20,000 20,000
6 18,000 25,000 30,000
7 18,000 — 40,000
8 18,000 — 50,000
a. Calculate the net present value (NPV) of each press.
b. Using NPV, evaluate the acceptability of each press.
c. Rank the presses from best to worst, using NPV.
d. Calculate the profitability index (PI) for each press.
e. Rank the presses from best to worst, using PI.
NPV -$ 4,228.21 $ 2,584.34 $ 15,043.89
b) Accepted or Rejected Rechazado Aceptado Aceptado
Ranking using NPV 3 2 1
Profitability Index PI 0.950 1.043 1.116
Ranking PI 3 2 1
NPV flujos 1-8 $ 80,772 $ 62,584 $ 145,044
g the replacement of one of its old metal stamping machines. Three
evant cash flows associated with each are shown in the following table. The
Problem 10-14
Internal rate of return. For each of the projects shown in the following table, calculate the inte
the maximum cost of capital that the firm could have and still find the IRR acceptable.
Project A Project B
Initial investment (CF0) $90,000 -$490,000
0 -90,000.0 -$490,000
1 20,000.0 $150,000
2 25,000.0 150,000
3 30,000.0 150,000
4 35,000.0 150,000
5 40,000.0 —
IRR 17.43% 8.62%
Maximo costo de capital 17.4223% 8.6136%
following table, calculate the internal rate of return (IRR). Then indicate, for each project,
nd the IRR acceptable.
Project C Project D
-$20,000 -$240,000
-$20,000 -$240,000
$7,500 $120,000
7,500 100,000
7,500 80,000
7,500 60,000
7,500 —
25.41% 21.16%
25.4030% 21.1464%
Problem 10-21
All techniques, conflicting rankings. Nicholson Roofing Materials Inc. is considering two mutu
investment of $150,000. The company’s board of directors has set a maximum 4-year payback re
The cash inflows associated with the two projects are shown in the following table.
Cash inflows (CFt)
Year Project A Project B
1 $45,000 $75,000
2 45,000 60,000
3 45,000 30,000
4 45,000 30,000
5 45,000 30,000
6 45,000 30,000
a. Calculate the payback period for each project.
b. Calculate the NPV of each project at 0%.
c. Calculate the NPV of each project at 9%.
d. Derive the IRR of each project.
e. Rank the projects by each of the techniques used. Make and justify a recommendation.
f. Go back one more time and calculate the NPV of each project using a cost of capital of 12%.
compared to your answer in part e? Why?
Solution
Year Project A Project B
0 ($150,000) ($150,000)
1 $45,000 $75,000
2 $45,000 $60,000
3 $45,000 $30,000
4 $45,000 $30,000
5 $45,000 $30,000
6 $45,000 $30,000
a) Payback 3.3333333333 2.5
b) NPV 0% $120,000 $105,000
c) NPV 9% $51,866.34 $51,112.36
d) IRR 19.91% 22.71%
e) Ranking:
Payback 2 1
NPV 0% 1 2
NPV 9% 1 2
IRR 2 1
f) NPV 12% $35,013.33 $37,436.61
Ranking 2 1
erials Inc. is considering two mutually exclusive projects, each with an initial
set a maximum 4-year payback requirement and has set its cost of capital at 9%.
the following table.
justify a recommendation.
ect using a cost of capital of 12%. Does the ranking of the two projects change
Problem 10-23
NPV, IRR, and NPV profiles. Thomas Company is considering two mutually exclusive projects
has estimated its cash flows as shown in the following table.
Initial investment Project A Project B
(CF0) -$130,000 -$85,000
Year (t) Cash inflows (CFt)
1 $25,000 $40,000
2 35,000 35,000
3 45,000 30,000
4 50,000 10,000
5 55,000 5,000
a. Calculate the NPV of each project, and assess its acceptability.
b. Calculate the IRR for each project, and assess its acceptability.
c. Draw the NPV profiles for both projects on the same set of axes.
d. Evaluate and discuss the rankings of the two projects on the basis of your findings in parts a,
e. Explain your findings in part d in light of the pattern of cash inflows associated with each pro
Solution
g two mutually exclusive projects. The firm, which has a 12% cost of capital,
ity.
ity.
axes.
basis of your findings in parts a, b, and c.
h inflows associated with each project.
