Solutions to Chapter 8
Net Present Value and Other Investment Criteria
15.

a.

r = 0%  NPV = –$6,750 + $4,500 + $18,000 = $15,750 r = 50%  NPV=  $6,750 

$4,500 $18,000

 $4,250
1.50
1.50 2

r = 100%  NPV=  $6,750 

$4,500 $18,000

 $0
2.00
2.00 2

b.
IRR = 100%, the discount rate at which NPV = 0.
Est time: 01–05

16.

NPV  $10,000 

$7,500 $8,500

 $2,029.09
1.12 2
1.12 3

Since the NPV is positive, the project should be accepted.
Alternatively, you can compute the IRR by solving for r, using trial and error, in the following equation:  $10,000 

$7,500 $8,500

 0  IRR = 20.61%
(1  r )2 (1  r )3

Since the IRR of the project is greater than the required rate of return of 12%, the project should be accepted.
Est time: 01–05
17.

NPV9% = –$20,000 + [$4,000  annuity factor (9%, 8 periods)]

 1

1

 $2,139.28
= – $20,000  $4,000  
8
 0.09 0.09  (1.09) 
NPV14% = –$20,000 + [$4,000  annuity factor (14%, 8 periods)]

 1

1

 $1,444.54
= – $20,000  $4,000  
8
 0.14 0.14  (1.14) 
IRR = discount rate (r), which is the solution to the following equation:
1

1
$4,000   
 $20,000  r = IRR = 11.81%
8
 r r  (1  r ) 
[Using a financial calculator, enter PV = ()20,000; PMT = 4,000; FV = 0; n = 8, compute
i.]

The project will be rejected for any discount rate above this rate.
Est time: 06–10
22. a.
Project
A
B
C

Payback
3 years
2 years
3 years

b.

Only Project B satisfies the 2-year payback criterion.

c.

All three projects satisfy a 3-year payback criterion.
$1,000 $1,000 $3,000
NPVA  $5,000 


 $1,010.52
1.10
(1.10) 2 (1.10) 3

d.

NPVB  $1,000 

$1,000 $2,000 $3,000


 $3,378.12
(1.10) 2 (1.10) 3 (1.10) 4

NPVC  $5,000 

$1,000 $1,000 $3,000 $5,000



 $2,405.55
1.10