55 56 57 58 Chapter 5 Time Value of Money ‘To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity procedures can never be of use, even when some of the cash flows constitute an annuity because the entire series is not an annuity. True or false? Explain, ‘The present value of a perpetuity is equal to the payment on the annuity, PMT, divided by the interest rate, I PV — PMT/L What is the future value of a perpetuity of PMT dollars per year? (Hint: The answer is infinity, but explain why.) Banks and other lenders are required to disclose a rate called the APR. What is this rate? Why did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were comparing the costs of loans from different lenders, could you use their APRs to determine the loan with the lowest effective interest rate? Explain. ‘What is a loan amortization schedule, and what are some ways these schedules are used? PROBLEMS Easy Problems 18 Intermediate Problems 9-26 54 52 53 54 55 56 57 58 59. 5-10 FUTURE VALUE If you deposit $10,000 in a bank account that pays 10% interest annwally, how much will be in your account after 5 years? PRESENT VALUE What isthe present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually? FINDING THE REQUIRED INTEREST RATE Your parents will retire in 18 years. They currently have $250,000, and they think they will need $1,000,000 at retirement. What annual interest rate must they earn to reach thelr goal, assuming they don’t save any additional funds? ‘TIME FOR A LUMP SUM TO DOUBLE If you deposit money today in an account that pay's 6.5% annual interest, how long will it take to double your money? ‘TIME TO REACH A FINANCIAL GOAL You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals, $250,000. You expect to earn 12% annually on the account. How many years will it take to reach your goal? FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE What's the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this was an annuity due, what would its future value be? PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and, $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is is present value? its future value? LOAN AMORTIZATION AND EAR You want to buy a car, and a local bank will lend you $20,000. The loan will be fully amortized over 5 years (60 months), and the nominal interest zate will be 12% with interest paid monthly. What willbe the monthly loan payment? What ‘will be the loan’s EAR? PRESENT AND FUTURE VALUES FOR DIFFERENT PERIODS Find the following values using the equations and then a financial calculator. Compounding/ discounting occurs annally. An initial $500 compounded for 1 year at 6% ‘An initial $500 compounded for 2 years at 6% ‘The present value of $500 due in 1 year at a discount rate of 6% ‘The present value of $500 due in 2 years at a discount rate of 6% PRESENT AND FUTURE VALUES FOR DIFFERENT INTEREST RATES Find the following values. Compounding/discounting occurs annually ‘a. An initial $500 compounded for 10 years at 6% ‘An initial $500 compounded for 10 years at 12% ‘The present value of $500 due in 10 years at 6% ‘The present value of $1,552.90 due in 10 years at 12% and at 6% Define present value and illustrate it using a time line with data from Part d. How are present values affected by interest rates? 153154 Part 2 Fundamental Concepts in Financial Management 511 512 513 514 515 5-16 517 518 5-19 GROWTH RATES Shalit Corporation’s 2008 sales were $12 million. Its 2003 sales were $6 million. 1 At what rte have ales been growing? robin of 100% in yea so diving 100% by 3 wend de gow rketoDe Sins per year Is that statement coret? EFFECTIVE RATE OF INTEREST Find the interest ates came on each of he following 8. You bree $700 and promis o pay back $749 atthe end of 1 yer. 5. You lent $700 and the borrower promises to pay you S79 atthe end of 1 year You bora $85,000 an promis to pay back $20.29 at the end of 10 years. 4. You tro $000 and promise to make payments of $2484.80 atthe end ofeach year for years, TIME FOR A LUMP SUM TO DOUBLE How long will it take $200 to double if it earns the following rates? Compounding occurs once a year. a T% b. 10% 18% 100% FUTURE VALUE OF AN ANNUITY Find the future values of these ordinary anaes. Compounding occurs once a year. a $400 per year for 10 years at 10% b. $200 per year for 5 years at 5% $400 per year for 5 years at 0% d._ Rework Parts a, b, and c assuming they are anmuites due PRESENT VALUE OF AN ANNUITY Find the present eulues of these ordinary anrauties Discounting occurs ance a year a, $400 per year for 10 years at 10% b, $200 per year for 5 years at 5% ‘c_ $400 per year for 5 years at 0% 4d. Rework Parts a, b, and ¢ assuming they are annuities due PRESENT VALUE OF A PERPETUITY What is the present value of a $100 perpetuity if the interest rate is 7%4? If interest rates doubled to 14%, what would its present value be? EFFECTIVE INTEREST RATE You borrow $85,000; the annual loan payments are $8,273.59 for 30 years. What interest rate are you being charged? UNEVEN CASH FLOW STREAM a, Find the present values of the following cash flow streams at 8% compounded annually. ° 1 2 3 4 5 $+ +—__+—__4 streamA $0 si00— $400-== «$400 «$400 «$300 StreamB $0 $300 $400, $400, $400 $100 b. What are the PVs of the streams at 0% compounded annally? FUTURE VALUE OF AN ANNUITY Your client is 40 years old; and she wants to begin saving for retirement, with the first payment to come one year from now. She can save $5,000 per year; and you advise her to invest it in the stock market, which you expect to provide lan average return of 9% in the future, a. If she follows your advice, how much money will she have at 65? b, How much will she have at 70? ‘&_ She expects to live for 20 years if she retires at 65 and for 15 years if she retires at 70. If her investments continue to earn the same rate, how much will she be able to ‘withdraw at the end of each year after retirement at each retirement age?Chapter 5 Time Value of Money 155 5-20 PV OF ACASH FLOW STREAM A rookie quarterback is negotiating his first NFL. contract. His opportunity cost is 10%, He has been offered three possible 4-year contracts, Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows: 4 tH Contract 1 $3,000,000 $3,000,000 $3,000,000 $3,000,000 Contract 2 $2,000,000 $3,000,000 $4,000,000 $5,000,000 Contract 3 ‘$7,000,000 $1,000,000 $1,000,000 $1,000,000 As his adviser, which contract would you recommend that he accept? 5-21 EVALUATING LUMP SUMS AND ANNUITIES Crissic just won the lottery, and she must ‘choose between three award options. She can elect to receive a lump sutn today of $61 million, to receive 10 end-of-year payments of $9.5 million, or to receive 30 end-of-year payments of $55 million. 1a. If she thinks she can earn 7% annually, which should she choose? b. If she expects to earn 8% annually, which is the best choice? cf she expects to eam 9% annually, which option would you recommend? 4. Explain how interest rates influence the optimal choice. 522 LOANAMORTIZATION, Jan sold he: hose on December and tsk 1000) morgage 8 ppartof the payment. The ID-year morgage has» 10% nominal interest rat, but i For semiannual payments beginning, next ne 30. Next yea Jon mist report on Schele B of her IRS For 1040 the amount of intrest that as included inthe two payments she received during the yea. ‘2. What is the dollar amount of each payment Jan receives? How much interest was included in the first payment? How much repayment of Principal was included? How do these values change for the second payment? ¢ How much interest must Jan report on Schedule B for the first year? Will her interest income be the same next year? d._ Ifthe payments are constant, why does the amount of interest income change over time? 5-23 FUTURE VALUE FOR VARIOUS COMPOUNDING PERIODS Find the amount to which $500 ‘will grow under each of these conditions: a. 12% compounded annually for 5 years b. 12% compounded semiannually for 5 years 12% compounded quarterly for 5 years d. 12% compounded monthly for 5 years 12% compounded daily for 5 years Why does the observed patter of FVS occur? Pri {ESENT VALUE FOR VARIOUS DISCOUNTING PERIODS. Find the present value of $500 due in the future under each of these conditions: 5-24 2. 12% nominal rate, semiannual compounding, discounted back 5 years b. 12% nominal rate, quarterly compounding, discounted back 5 years 12% nominal rate, monthly compounding, discounted back 1 year ‘d._ Why do the differences in the PVs occur? 5-25 FUTURE VALUE OF AN ANNUITY Find the future values of the following ordinary annuities: 4 FV of $400 pad each 6 months for 5 years a » nominal rate of 12% compounded semiannually b. FV of$200 paid each 3 months for 5 years ata nominal rate of 12% compounded quarterly ‘These annuities receive the same amount of cash during the 5-year period and eam interest at the same nominal rate, yet the annuity in Part b ends up larger than the one in Part a. Why does this occur?358 Part 4 Investing in Long-Term Assets: Capital Budgeting QUESTIONS CAPITAL BUDGETING CRITERIA You must analyze two projects, X and Y. Fach project costs $10,000, and the firm’s WACC is 12%, The expected net cash flows are as follows ° 1 2 3 4 {++} ProjectX $10,000 $6,500 $3,000, $3,000 $1,000 ProjectY $10,000 $3,500 $3,500 $3,500 $3,500 Calealate each project's NPV, IRR, MIR, payback, and discounted payback. ‘Which project(s) should be accepted if they are independent? Which project(s) should be accepted if they are mutually exclusive? How might a change in the WACC produce a conflict between the NPV and IRR rankings of the two projects? Would there be a conflict if WACC were 5%? (Hint Plot the NPV profiles. The crossover rate is 6.21875%) fe. Why does the conflict exist? mw 2 3 16 19 11-10 How are project classifications used in the capital budgeting process? What are three potential flaws with the regular payback method? Does the discounted payback method correct all three flaws? Explain. Why is the NPV ofa relatively long-term project (one for which a high percentage of its cash flows occurs in the distant future) more sensitive to changes in the WACC than that of 2 short-term project? What is a mutually exclusive project? How should managers rank mutually exclusive projects? If two mutually exclusive projects were being compared, would a high cost of capital favor the longer term or the shorterterm projec!? Why? If the cost of capital declined, would that lead firms to invest more in longer-term projects or shorter-term projects? Would a decline (or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects? Discuss the following statement: Ifa firm has only independent projects, constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to ‘dential capital budgeting decisions. What does this imply about the choice between IRR and NPV? If each of the assumptions were changed (one by one), how would your answer change? Why might it be rational for a small firm that does not have access to the capital markets to use the payback method rather than the NPV method? Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPV of $2.5 million. ‘They are mutually exclusive, and project risk has been properly considered in the NPV analyses, Which project should be chosen? Explain. ‘What reinvestment rate assumptions are buill into the NPV, IRR, and MIRR methods? Give an explanation (other than “because the text says $0”) for your answer. A firm has a $100 millon capital budget. It is considering two projets, each costing '$100 million. Project A has an IRR of 207%; has an NPV of $9 million; and will be terminated after 1 year at a profit of $20 million, resulting in an imunediate increase in EPS. Project B, ‘which cannot be postponed, has an IRR of 30% and an NPV of $50 million. However, the fiem’s short-run EPS will be reduced if it accepts Project B because no revenues will be generated for several years. 1, Should the short-run effects on EPS influence the choice between the two projects? b, How might situations like this influence a firm’s decision to use payback?‘Chapter 11 The Basics of Capital Budgeting PROBLEMS Easy Ww Problems 16 2 113 4 Ws 16 Intermediate 11-7 Problems 73 118 9 NPV _ Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%, What is the project's NPV? IRR. Refer to Problem 11-1. What isthe project's IRR? MIR. Refer to Problem 11-1, What is the project's MIRR? PAYBACK PERIOD Refer to Problem 11-1, What is the project's payback? DISCOUNTED PAYBACK Refer to Problem 11-1. What i the project's discounted payback? NPV Your division is considering two projects with the following net cash flows (in millions}: ° 2 tp +4 Project =S25 $5 sto 317 Project8 $20 sto 39 56 a. What are the projects’ NPVs assuming the WACC is 5%? 10%2 1556? b. What are the projects! IRRs at each of these WACCs? Ifthe WACC was 5% and A and B were mutually exclusive, which project would you choose? What if the WACC was 10%? 15%? (Hint: The crossover rate is 781%.) CAPITAL BUDGETING CRITERIA A firm with 2 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows: ° 1 2 3 4 5 -_——+—__+—_+—_+—_4 ProjectA $6,000 $2,000 $2,000 «$2,000 $2,000 $2,000 Project -$18,000 $5,600 $5,600 $5,600 $5,600 $5,600 Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. ‘Assuming the projects are independent, which one(s) would you recommend? If the projects are mutually exclusive, which would you recommend? ‘Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR? CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $10 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $60 million, and the expected net cash inflows would be $20 million per year for 5 year. Ifthe firm does invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC is 12%, ‘a, Calculate the NPV and IRR with and without mitigation. b. How should the environmental effects be dealt with when this project is evaluated? Should this project be undertaken? If so, should the firm do the mitigation? CAPITAL BUDGETING CRITERIA: ETHICAL CONSIDERATIONS An electric uty is consid tring anew power plant in northem Arizona. Power frm the plant would be sold inthe Phoenix area wher itis badly needed. Becase the frm has recived a permit the plant ‘would be legal but it woud cause some ar pollaton. The company could spend an ddulitonal $40 min at Year Oto mitigate the environmental problem, but fe would not ibereguired to do so, The plant without mitigation would cost S240 min, and the expected net cash inows would be $80 millon per yeat for years Ifthe fim does invest intigation, the anna inflows would be S84 milion. Unemployment in the area where the plant would be bul is high, and the plant would provide about 390 good job. The rukeadjusted WACC Is 17% ‘a, Caleulate the NPV and IRR with and without mitigation. b. How should the environmental effects be dealt with when evaluating this projec? ¢ Should this project be undertaken? If so, should the firm do the mitigation? 359360 Part 4 Investing in Long-Term Assets: Capital Budgeting 1410 wt m2 11413 Challenging 11-14 Problems 22 145 ‘CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS A firm with a WACC of 10% is considering the following mutually exclusive projects: ° 1 2 3 4 5 +} ++ 4 ProjectA —$400 $55 $55 $55 $225 $225 Project B —$600 $300 $300 $50 $50 $49 Which project would you recommend? Explain. ‘CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs $15,000, and its expected cash flows would be $4,500 per year for 5 years, Mutually exclusive Project L. costs $37,500, and its expected cash flows would be $11,100 per year for 5 years. If both projects have a WAC of 14%, which project would you recommend? Explain. IRR AND NPV A company is analyzing two mutually exclusive projects, $ and L, with the following cash flows: ° 1 2 3 4 +++ Project S —$1,000 $900, $250 $10 $10 Project L —$1,000 $0 $250 $400 $800 ‘The company’s WACC is 10%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR) MIRR__A firm is considering two mutually exclusive projects, X and Y, with the following cash flows: ° 1 2 3 4 «tH$£+—— ttt Projectx $1,000 $100 $300 $400 $700 ProjectY $1,000 $1,000 $100 $50 $50 ‘The projects are equally risky, and their WACC is 12%, What isthe MIRR of the project that maximizes shareholder value? CHOOSING MANDATORY PROJECTS ON THE BASIS OF LEAST COST K. Kim Inc. must install a new air conditioning unit in its main plant, Kim must instal one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are avail able, HCC and LCC (for high and low capital costs, respectively), HCC has a high capital cost ‘but relatively low operating costs, while LCC has a low capital cost buthigher operating costs because it uses mare electricity. The casts of the units are shown here. Kim’s WACC is 7% ° 1 2 3 4 5 $+ +—_+—_+— HCC -$600,000 -$50,000 $50,000 —$50,000 $50,000 —$50,000 LCC $100,000 -$175,000 -$175,000 -$175,000 -$175,000 $175,000 a. Which unit would you recommend? Explain, 1f Kins controller wanted to know the IRRs ofthe two projets, what would you tell him? Ir the WACC rose to 15% would this affect your recommendation? Explain your answer and the reason this result occurred. ™ Panyou [NPV PROFILES: TIMING DIFFERENCES An cil driling company must choose between ‘wo mutually exclusive extraction projects, and each costs $12 million, Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t= 1 of $14.4 million, Under Plan B, cash flows would be $211 million per year for 20 years. The firm’s WACC is 12%. a, Construct NPY profiles for Plans A and B, identity each projects IRR, and show the approximate crossover rate , Ist logical to assume that the firm would take on all available independent, average-risk projects with returns greater than 12%? If all available projects with returns greater than 12% have been undertaken, does this mean that cash flows from past investments have an opportunity cast of only 12% because all the company can do ‘with these cash flows is to replace money that has a cost of 12%? Does this imply that the WACC is the correct reinvestment rate assumption for a project's cash flows?11416 wiz 11418 19 11:20 21 ‘Chapter 11 The Basics of Capital Budgeting NPV PROFILES: SCALE DIFFERENCES _A company is considering two mutually exclusive txpasion plans Plan A fequles a S40 milion expenditure ona angescale integrated Plant that would provide expected cash flows of $64 milion per year for 20 years. Plan B Fequires a §12 nibion expenditure to build a somewhat less ecient, more labor-intensive Plant with expected cash flows of $272 millon per year for 20 yeats. Te firm's WACC Bios Calculate each projec’s NPV and IRR. Graph the NPV profiles for Plan A and Plan B and approximate the crossover rae Why is NPV beter than IRK for making capital budgeting dosons that ato archolder va? CAPITAL BUDGETING CRITERIA. company has a 12% WACC and is considering two snutually excsive investment (iat anno! be repeated) with the folowing net cash ows o 1 2 8 4 5 6 7 +++ +++ ProjectA —$300 -$387 -$193 —$100 $600 $600 $850 $180 ProjectB = —$405 $134 $134 $134 $134 $134 $134 $0 What is each project's NPV? What is each project's IRR? ‘What is each project's MIRR? (Hint: Consider Period 7 as the end of Project B's life) From your answers to Parts a,b, and c, which project would be selected? If the WACC ‘was 18%, which project would be selected? Construct NPV profiles for Projects A and B. £ What is each project's MIRR at a WACC of 18%? NPV AND IRR A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month, The mall’s owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable, Therefore, the store has been offered a “great deal” (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,600 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month). ‘a. Should the new lease be accepted? (Hint: Make sure you use 1% per month) b. Ifthe store owner decided to bargain with the mall's owner over the new lease payment, ‘what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV ofthe old lease’s original cost at t= 9; then treat thisas the PV of a Si-period annuity whose payments represent the rent during months 10 to 60.) cc. The store owner isnot sure of the 12% WACC—it could be higher or lower. At ‘what nominal WACC would the store owner be indifferent between the tro leases? (Hint: Calculate the differences between the two payment streams; then find its IRR) MULTIPLE IRRS AND MIRR A mining company is deciding whether to open a strip mine, which costs $2 million. Net cash inflows of $13 million would occur at the end of Year 1 ‘The land must be returned to its natural slate ata cost of $12 million, payable at the end of Year 2. ‘a. Plot the project's NPV profile. ‘Should the project be accepted if WACC = 1094? if WACC = 20%? Explain your reasoning. Think of some other capital budgeting situations in which negative cash flows during cor at the end of the project's life might lead to multiple IRRs. 4d. Whatis the project's MIR at WACC = 10%? at WACC = 20°? Does MIRR lead to the same accept/reject decision for this project as the NPV method? Does the MIRR ‘method alieays lead to the same accept reject decision as NPV? (Hint: Consider ‘mutually exclusive projects that differ in size.) NPV _A project has annual cash flows of $7,500 for the next 10 years and then $10,000 cach year for the following 10 years. The IRK of this 20-year project is 10.98%. Ifthe firm's WACC is 9%, what is the project's NPV? MIR. Project X costs $1,000, and its cash flows are the same in Years 1 through 10. Its IRR is 12%, and its WACC is 10%, What is the project’s MIRR? anes 361e_ a A28 Answers to Selected End-of-Chapter Problems Appendix B provides some intermediate steps and final answers to selected end-of-chapter problems. Please note that your answer may differ slightly from those provided here due to rounding differ- ences. Also, although it was not the intent, some of the problems may have more than one correct solution depending on what assumptions were made in working the problem. Finally, many of the problems involve some verbal discussion as well as ‘numerical calculations; the verbal material is not presented here. 3-2. $2,500,000 3-4 a, possibly © 3-6 a. $50,000 . $115,000 3-8 $12,681,482 310 NWCay = $210,000,000 . FCF = $58,000,000, 42 D/A=58.30% 44 2867 46 ROE =8% 48 4-10 2% D/A = 40% 4412 TIR=3.86 414 AROE ~ +5.54%; QR = 12 416 4-18 $262,500 4-20 $50 4-22 a, Current ratio = 1.98; DSO = 7633 days; Total assets turnover = 1.70; Debt ratio = 61.9% Pv =$1,292.10 N=11.01 years BVAs = $1,725.22; FVAs nye = $1,845.99 PMT = $444.89; EAR = 12.6825% - $895.42 $152.92 $279.20 $3499.99; $867.13 Egre 540 542 Boo Bore sad 516 548 520 522 524 12 ota 16 18 72 74 a. $6374.97 bb. $1,105.13, ©. $2,000.00 a.) 8701247 2) 1,160.38 (3) $2,000.00 PV, = $1428.57; PVaqy = $714.29 a. Stream A: $1,251.25 Stream B: §1,30032 b. Stream A and Stream B: $1,600 Contract 2; PV = $10717,847.14 a. $802.43 b. Pymt 1: Int = $500; Prine pymt = $302.43. Pymt 2: Int = $484.88; Prine pymt = $317.55 $984.88 a. $279.20 b. $276.84 $463.72 $17,290.89; $19,734.26 Inox = 7.871% a. E = 63.74 yrs; K = 41.04 yrs b $35,825.33 $496.11 a. PMT = $10,052.87 b. ¥r3: Int/Pymt = 9.09%; Princ/Pymt = 90.91% a. $5308.12 bb. $4877.09 $309,015 99,385 2.25% 15% 21.8% 85% 6.0% 035% a. in Year bk = 2% b 14% a. r= 9.20%; 720% 7.22% b, $988.46 YIM = 6.62%; YTC = 6.49%; most likely yield = 6.49%76 78 7410 a2 744 7416 718 82 84 86 88 840 842 a4 846 843 820 92 94 96 98 9410 942 944 916 - YTM = 9.68% >. CY = BA7SM%; CGY = 0.816% a. TLGK = 61%; UPS = 3.65% bp = 112 ty = 11% 8 a iy = 4% B. ox = 12.20% b=133 42% a. = 155% D.C) ny = 15% 5 = 165% 2) 14 = 13% = 4% e) = 181% 2.2% 2. $05 million 4.) $75,000 @) 15% aq = 11.30%; 09 Ds ty ayg = 1.30% a. 1.30% 4 = 20.8%; 5 = 20.8%; oy = 20.1% LCV, = CV = 1.84; CV = 178 Py = 96.25 a. end of Year 2 b. $37.80 © 93409 1p = 839% a. $125 b $93.33 93.75 a. (1) $950 @) $13.33 () $21.00 (4) $4400 b. () Undefined (2) $48.00, which is nonsense Pp = $19.89) 6.25% Appendix B. Answers to Selected End-of Chapter Problems oa 9.20 102 10-4 106 108 10-10 10-12 10-14 10-16 10-18 10-20 2 m4 116 118 1-10 m2 m4 11-16 1.18 11-20 m2 A29 a. Po $35.00 1 = 8% ar. = 15% bere = 16.11% a5, = 163% ben = 154% cr = 16% 4. re agg = 159% 5, = 16.51%; WACC WACC = 11.4% ar, = 14.40% Bb. WACC = 10.62% 6. Project A 194% a. g=8% B.D = $2.81 c= 15 81% ‘$54.11; Dy/Po = 3.55%; CGY = 6.45% 10.20%; 7%; b. WAC = 13.86% . Projects | and 2 will be accepted. a. ra(1~T) = 5A%; re = 14.6% b. WACC = 10.92% IRR = 16% 434 years 5%: NPV, = $3.52; NPVy = $2.87 10%: NPV, ~ $0.58; NPVa ~ $1.04 15%: NPV, = ~$1.91; NPVg = ~50.55 1b, IRR, = 11.10%; IRRy ~ 13.18% © 5%: Choose A; 10% Choose B; 15%: Do not choose either one. a. Without mitigation: NPV IRR = 19.86% With mitigation: NPV = $5.70 million; IRR = 15.24% Project A; NPVs 12.10 million; $30.16 IRR, = 11.74% a. HCC; PV of costs ~ $805,009.87 © LCC; PV of costs = $686,627.14 a 14,486,808; NPVa = $11,156,893; 15.03%; IRRy . Crossover rate ~ 12% a. No; PVou = ~$89,910.08; $94,611.45 22.26% PVsew b. $2,470.80 ©. 22.98% $10,239.20, $250.01