Solutions to Class 24 Manual HW

Manual HW Day 24

1. A firm has estimated the following cash flows for a project:

Year 0 -$100,000
Year 1 45,000
Year 2 52,000
Year 3 43,000

If the firm has a required rate of return of 20%, should this project be accepted? a. Calculate NPV b. Calculate IRR

Cfo 100000 Enter ↓
C01 45000 Enter ↓
F01 1 Enter ↓
C02 52000 Enter ↓
F02 1 Enter ↓
C03 43000 Enter ↓
F03 1 Enter ↓
NPV 20 Enter ↓ CPT NPV -1,504.63 reject NPV<0

IRR CPT 19.03% reject IRR< RROR

2. For the project above, if the firm has a required payback of 3 years, should this project be accepted? Calculate the Payback Period Year

Year 1 45,000
Year 2 45,000+ 52,000 = 97,000
Year 3 3,000/43,000 = 0.0698
Payback period = 2 + 0.0698 = 2.0698 accept, since payback period < 3 years

3.Two projects are mutually exclusive. Management has asked you to decide between them. Recommend which project should be accepted and why. Project A has a cost of $400,000 and has expected cash inflows of $75,000 for 10 years. Project B has a cost of $400,000 and has expected cash inflows of $90,000 for 7 years. The discount rate for both projects is 11%.

Project A

CF 2nd CLR WORK
CF0 = 400,000 +/-enter ↓
C01=75,000 enter ↓
F01 = 10 enter ↓
NPV I = 11 enter ↓ CPT 41,692.40

Project B

CF 2nd CLR Work
CFo 4000000+/- Enter ↓
C01 90000 Enter ↓
F01 7 Enter ↓
NPV I = 11 Enter ↓ CPT
24,097.66

Select A higher NPV

TKM
Ch12

SQ12-1. One obvious possibility is that Toyota is being paid for the technology. Although we do not know the specifics of the financial arrangement between the two auto makers, there probably is some type of royalty payment involved. This means that every time Ford sells a hybrid Fusion it has to pay Toyota a fee for the use of its technology. Moreover, if the technology