Exercises pages 162-164

1. Calculation of the payback period and the NPV Fuji Software, Inc. has the following projections

Year Project A Project B

0 10000 12000
1 6500 7000
2 4000 4000
3 1800 5000

a) Suppose that the recovery period limit for Fuji is two years. Which of these d

Payback Year 0 Year 1 Year 2

6500 4000
Free Cash Flows

10000 3500 -500

Investment to recover

Payback (A) 0.88 10.50 0.50

The investment will be recovered in 1 year, 10 months, and 15 days.

Project A has a shorter payback period, therefore it should be chosen.

b) Suppose that Fuji uses the net present value rule to classify these two projects. What?
Should the project choose the company if the appropriate discount rate is 15%?

Investment Year 1 Year 2

Free Cash Flow -10000 6500 4000
(A)
Free Cash Flows -12000 7000 4000
(B)

Discount rate 15%

VAN (A) -$139.72
VAN (B) $399.11

If the NPV is taken into account to classify these two projects, project B should be chosen.

2. Calculation of the payback period An investment project generates cash flows from income
cash of 970 dollars per year for eight years. What is the payback period of the p
If the initial cost is 4,100 dollars? And if the initial cost is 6,200 dollars? And if it is
8,000 dollars?
 Years Cash Flows
1 970
2 970
3 970
4 970
5 970
6 970
7 970
8 970

Payback Year 0 Year 1 Year 2

Cash flows 970 970

4100
Investment to recover

Payback 4.23 0.23 2.72

The investment will be recovered in 4 years, 2 months, and approximately 22 days.

Payback Year 0 Year 1 Year 2

Cash flows 970 970

6200
Investment to recover

Payback 6.39 0.39 4.70

The investment will be recovered in 6 years, 4 months, and approximately 22 days.

Payback Year 0 Year 1 Year 2

Cash flows 970 970

8000
Investment to recover

Payback 8.25 0.25 2.97

The investment will be recovered in approximately 8 years and 2 months, about 30 days.
This last alternative would not be considered as it exceeds the pr period.

3. Calculation of the discounted payback period An investment project has cash flows...
cash inflow of 6,000, 6,500, 7,000, and 8,000 dollars, and a discount rate of 14%.
it is the discounted payback period of these cash flows if the initial cost is 8
Dollars? What if the initial cost is 13,000 dollars? What if it is 18,000?

Years Cash flows Investment

1 6000
 2 6500 $8,000
3 7000 $13,000
4 8000 $18,000

Discount rate 14% Discounted Payback

(years)

4. Calculation of the discounted payback period An investment project costs 10,000

and has annual cash flows of 2,600 dollars for six years. What is the period of r
discounted if the discount rate is 0%? And if the discount rate is 10%? And
Is it 15%?

Years Cash Flow

1 2600
2 2600
3 2600
4 2600
5 2600
6 2600

Payback Year 0 Year 1 Year 2

Flujos de caja 2600 2600

10000
Investment to recover

Payback (0%) 3.85 0.85 10.15

10% 15%
2363.64 2260.87
2148.76 1965.97
1953.42 1709.54
1775.83 1486.56
1614.40 1292.66
1467.63 1124.05
9856.05 8715.60
5, 10 years 6.14 years

5. Calculation of the IRR Teddy Bear Planet, Inc. has a project with the following cash flows

Year Cash Flows

0 -11000
1 5500
2 4000
 3 3000

The company evaluates all projects applying the IRR rule. If the approximate interest rate
it is 8%, should the company accept the project?

TIR 7% The company should not accept the project and

6. Calculation of the IRR Calculate the internal rate of return of the cash flows of the two
following projects:

Flujo de efectivo ($)

Year Project A Project B
0 -3500 -2300
1 1800 900
2 2400 1600
3 1900 1400

TIR (A) 33%

TIR (B) 29%

10. Problems with the IRR Suppose that today you are offered $8,000, but you must do the following
payments:

Year Cash flow ($)

0 8000
1 -4400
2 -2700
3 -1900
4 -1500

a) What is the IRR of this offer?

TIR = 15%

b) If the appropriate discount rate is 10%, should this offer be accepted?

Yes, the company must accept this offer since it has an IRR greater than that rate.

c) If the appropriate discount rate is 20%, should he accept this offer?

No, because it has an IRR lower than the discount rate.

d) ¿Cuál es el VPN de la oferta si la tasa de descuento apropiada es de 10%? ¿Y si es de 20%

 Investment Year 1 Year 2
Free Cash Flows 8000 -4400 -2700

Discount rate 10% 20%

VAN (10%) -$683.42

VAN (20%) $635.42

e) Are the decisions from item d) that were made according to the NPV rule consistent with

No, no serían congruentes ya que este proyecto no es una inversión como tal, los fl

11. VPN vs TIR Consider the following cash flows for two mutually exclusive projects.
projects require an annual return of 14 percent.

Fishing in waters New walk

Year
deep submarine
0 -750000 -2100000
1 310000 1,200,000
2 430000 760000
3 333000 850000

Investment Year 1 Year 2

Free Cash Flows -750000 310000 430000
(Fishing)
Free Cash Flow -2100000 1,200,000 760000
(Walk)

Rate of Return 14%

VAN (Fishing) $77,566.38
VAN (Walk) $111,152.69
TIR (Fishing) 20%
TIR (Walk) 17%

As a financial analyst at BRC, you are presented with the following questions:
a) If your decision rule is to accept the project with the highest IRR, which project

If that were the case, the Fishing project should be chosen.

b) Because you are very well aware of the scale problem of the IRR rule, c

It is likely that when applying the incremental IRR, it will be a percentage higher than
c) To be prudent, you calculate the NPV of both projects. Which project should you choose? ?

Using the VPN method with a return rate of 14%, one must choose
mutually exclusive projects:

Which two projects should the company choose?

Year 3 Payback Year 0 Year 1 Year 2 Year 3

1800 Flows of 7000 4000 5000

Free Box
Investment by 12000 5000 1000 -4000
recover

15 Payback (B) 0.20 2.40 0.40 12

The investment will be recovered in 2 years, 2 months, and 12 days.

e.

What

Year 3

1800

5000

that has a positive VPN.

that of
project
 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
970 970 970 970 970 970

0.72 21.65

days.

Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

970 970 970 970 970 970

0.70 21.03

days.

Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

970 970 970 970 970 970

0.97 29.07

days.
project.

annual of
Which
8,000

Year 1 Year 2 Year 3 Year 4

5263 5002 4725 4737
 -2737 2265 2460
-7737 -2735 1989
-12737 -7735 -3011 1726

$8,000 $13,000 $18,000

1.55 2.58 3.64

dollars
recovery

Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

2600 2600 2600 2600 2600 2600

0.15 4.62

ectvo:
opiated

ya que el porcentaje de la TIR es menor a la tasa de interés apropiada.

os

next

appropriate discount.

%?
 Year 3 Year 4
-1900 -1500

the rules of the IRR?

luxuries are not a source of income and therefore the IRR works inversely.

usually exclusive to Bahamas Recreation Corporation (BRC). Both

Year 3

333000

850000

must choose?

calculate the incremental IRR of the cash flows. Based on your calculations, which project should you choose?

the annual return of 14%, therefore one of the two projects could choose the lesser project
Is it consistent with the rule of the incremental IRR?

the New Walk project since it is 111.152.69 and greater than that of Deep Sea Fishing.
or TIR.
 project project
year
A B
I $9,000 $9,000

1 $2,200 $1,500
2 $2,500 $1,500
3 $2,500 $1,500
4 $2,000 $3,500
5 $1,800 $4,000

a) How long will it take for Bill to recover his initial investment in the
Project A?

Payback year 0 year 1 año 2 año 3 año 4

free cash flow $2,200 $2,500 $2,500 $2,000
investment to recover $9,000 6800 4300 1800 -200

Payback (A) $1

the investment will be recovered in 4 years

b) How long will it take Bill to recover his initial investment in the
project B?

Payback year 0 year 1 year 2 year e year 4 year 5

free cash flow $1,500 $1,500 $1,500 $3,500 $4,000
investment to recover $9,000 7500 6000 4500 1000 -3000

Payback (B) 0.25 3

the investment will be recouped in 4 years and 3 months

c) Using the investment payback period, which project

Should I choose Bill?

Bill will have to use Project A if he wants to recover his investment.

as soon as possible.

d) Do you think there is a problem with this choice?

 It will depend on how the cash flow in the investment turns out.
although it may result in a decrease, it is not expected to have any
problem with that choice

a) The initial investment is $10,000; the cash inflows are

$2,000 annually.

project (A)

I $10,000
year 1 $2,000

year 2 $2,000

year 3 $2,000
year 4 $2,000
year 5 $2,000
year 6 $2,000
year 7 $2,000
year 8 $2,000
year 9 $2,000
year 10 $2,000
year 11 $2,000
year 12 $2,000
year 13 $2,000
year 14 $2,000
year 15 $2,000
year 16 $2,000
year 17 $2,000

year 18 $2,000
year 19 $2,000
year 20 $2,000
VAN 23.246
CUR 14%
b) The initial investment is $25,000; the cash inflows are
$3,000 per year.

Project (B)

I $25,000

year 1 $3,000
year 2 $3,000
year 3 $3,000
year 4 $3,000
year 5 $3,000
year 6 $3,000
year 7 $3,000
year 8 $3,000
year 9 $3,000
year 10 $3,000
year 11 $3,000
year 12 $3,000
year 13 $3,000
year 14 $3,000
year 15 $3,000
year 16 $3,000
year 17 $3,000
year 18 $3,000
year 19 $3,000
year 20 $3,000
VAN 5,131
CUR 14%

c) The initial investment is $30,000; the cash inflows are

$5,000 annually.

Project (C)
I $30,000
year 1 $5,000
year 2 $5,000
year 3 $5,000
year 4 $5,000
year 5 $5,000
year 6 $5,000
year 7 $5,000
year 8 $5,000
year 9 $5,000
year 10 $5,000
year 11 $5,000
year 12 $5,000
year 13 $5,000
year 14 $5,000
year 15 $5,000
año 16 $5,000
year 17 $5,000
year 18 $5,000
year 19 $5,000
year 20 $5,000
VAN 1,297
CUR 15%

$24,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000

2674.63
10%

838.2
12%
-805.68
14%
 $26,000 $500,000 $170,000 $950,000 $80,000

1 $4,000 $100,000 $20,000 $230,000 $0

2 $4,000 $120,000 19000 $230,000 0
3 $4,000 $140,000 18000 $230,000 0
4 $4,000 $160,000 17000 $230,000 $20,000
5 $4,000 $180,000 16000 $230,000 $30,000
6 $4,000 $200,000 15000 $230,000 0
7 $4,000 14000 $230,000 $50,000
8 $4,000 13000 $230,000 $60,000
9 $4,000 12000 $70,000
10 $4,000 11000

$20,864
-5,136

$553,887
$53,887

$86,338
-83,668

$1,066,938
$116,938
 $90,030
$9,963

$85,000 $60,000 $130,000

1 $18,000 $12,000 $50,000

2 $18,000 14000 $30,000
3 $18,000 16000 $20,000
4 $18,000 18000 $20,000
5 $18,000 20000 $20,000
6 $18,000 25000 $30,000
7 $18,000 $40,000
8 $18,000 $50,000

$85,000 $60,000 $130,000

8 6 8
0.15 0.15 0.15
80,771.79 62,584.34 145,043.89
85,000.00 60,000.00 130,000.00
0.95 1.04 1.12