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Chapter 9 Homework Key

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Chapter 9 Homework key
I’ve edited the questions as indicated on the assignment web page. Also note that many of the present values in the key here are shown in the key using PV factors from tables. I expect you to do the problems with your calculator and show your calculator inputs and the result.

1. A project has the following cash flows C0 C1 C2 C3 ($700) $200 $500 $244 a. What is the project’s payback period? b. Calculate the projects NPV at 12%. c. Calculate the project’s IRR

SOLUTION:
a. The cumulative cash flow is Year 0 1 2 3 Cash Flow ($700) $200 $500 $244 Cumulative ($700) ($500) 0 $244
Cumulative cash flow is zero after two years, hence the payback period is two years.

b. Year Ci PVFk,i Ck,i ( PVFk,i 0 ($700) 1.0 ($700) 1 $200 .8929 $179 2 $500 .7972 $399 3 $244 .7118 $174 NPV = $ 52

c. With the cash flows above entered in your calculator, hit the IRR key and find that the IRR is 16.03%

3. Clancy Inc. is considering a project with the following cash flows. C0 C1 C2 C3 ($7,800) $2,300 $3,500 $4,153

a. Clancy has a policy of rejecting all projects that don’t pay back within three years outright, and analyzing those that do more carefully with time value based methods. Does this project warrant further consideration? b. Should Clancy accept the project based on its NPV if the company’s cost of capital is 8%? c. Based on IRR, what conclusion will the firm reach?

SOLUTION:
a. The cumulative cash flow is Year 0 1 2…...

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