Chapter 9 HW- Practice

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow 0 -$ 27,000 1 11,000 2 14,000 3 10,000 If the required return is 16 percent, what is the IRR for this project? (From the homework not HW practice)

$14.38 The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is: 0 = -$27,000 + $11,000 / (1 + IRR) + $14,000 / (1 + IRR)^2 + $10,000 / (1 + IRR)^3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 14.38% *Since the IRR is less than the required return, we would reject the project.*

What is the payback period for the following set of cash flows? Year Cash Flow 0 -$ 5,700 1 1,350 2 1,550 3 1,950 4 1,450

3.59 Explanation: 1. add the cash flow of years 1-3 2. year 0 cash flow - the sum of year 1-3 cash flow 3. the sum from step 2, divided by year 4 cash flow, plus 3

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 -$ 27,200 1 11,200 2 14,200 3 10,200 What is the NPV for the project if the required return is 11 percent? At a required return of 11 percent, should the firm accept this project? What is the NPV for the project if the required return is 25 percent? At a required return of 25 percent, should the firm accept this project? (From HW not practice HW)

What is the NPV for the project if the required return is 11 percent? $1,873.28 At a required return of 11 percent, should the firm accept this project? No What is the NPV for the project if the required return is 25 percent? $-3,929.60 At a required return of 25 percent, should the firm accept this project? Yes Explanation: NPV = -$27,200 + $11,200 / 1.11 + $14,200 / 1.112 + $10,200 / 1.113 = $1,873.28 At an 11 percent required return, the NPV is positive, so we would accept the project. The equation for the NPV of the project at a required return of 25 percent is: NPV = -$27,200 + $11,200 / 1.25 + $14,200 / 1.252 + $10,200 / 1.253 = -$3,929.60 At a required return of 25 percent, the NPV is negative, so we would reject the project.

An investment project provides cash inflows of $645 per year for eight years. What is the project payback period if the initial cost is $1,550? What is the project payback period if the initial cost is $3,300? What is the project payback period if the initial cost is $5,400?

What is the project payback period if the initial cost is $1,550? 2.40 1550/ 645 initial cost (calculating for) / cash inflows per year for 8 years What is the project payback period if the initial cost is $3,300? 5.12 initial cost (calculating for) / cash inflows per year for 8 years What is the project payback period if the initial cost is $5,400? 0