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F.A7: Basic Test Bank For Finance
F.A7: Basic Test Bank For Finance
F.A7: Basic Test Bank For Finance
Installation cost
# of years
Projected net income:
Year 0
Year 1
Year 2
Year 3
$ 18,000,000
4
$
$
$
$
1,632,000
2,106,500
1,941,700
1,298,000
$1,744,550
$9,000,000
19.38%
(a)
A7.2
CFs
A
Year 0
$
(37,000)
Year 1
$
19,000
Year 2
$
14,500
Year 3
$
12,000
Year 4
$
9,000
Required return
$
$
$
$
$
B
(37,000)
6,000
12,500
19,000
23,000
11%
(b)
NPV (A)
NPV (B)
The NPV decision rule implies we accept
$
$
6,588.52
7,594.13
Project B
(c)
Crossover rate
14.25%
IRR (A)
20.30%
IRR (B)
18.55%
The implication of ranked IRR is to accept
Project A
This may not be a correct decision however, because the
IRR has a ranking problem for mutually exclusive projects
To see if the ranked IRRs lead to the correct decision or
not, we need to evaluate the project NPVs.
CF difference
Year 0
$
Year 1
$
13,000
Year 2
$
2,000
Year 3
$
(7,000)
Year 4
$
(14,000)
(1)
A7.3
CFs
A
Year 0
$
(350,000)
Year 1
$
25,000
Year 2
$
70,000
Year 3
$
70,000
Year 4
$
430,000
Required return
$
$
$
$
$
B
(35,000)
17,000
11,000
17,000
11,000
15%
Payback (A)
Payback (B)
Payback criterion implies accept
because it pays back sooner.
(3)
NPV (A)
NPV (B)
NPV criterion implies accept
because it has a higher NPV.
$ 16,549.22
$ 5,567.25
Project A
(4)
IRR (A)
IRR (B)
IRR decision rule implies accept
because its IRR is greater.
16.57%
23.05%
Project B
(5)
PI (A)
PI (B)
Profitability index criterion implies accept
because its PI is larger.
A7.4
1.047
1.159
Project B
Discounting approach:
Year
CF
0
$ (14,669.96)
1
$
5,800.00
2
$
6,500.00
3
$
6,200.00
4
$
5,100.00
5
$
-
3.43
2.41
Project B
Project A
Reinvestment approach:
Year
CF
0
$ (12,000.00)
1
$
2
$
3
$
4
$
5
$
25,955.28
Combination approach:
Year
CF
0
$ (14,669.96)
1
$
2
$
3
$
4
$
5
$ 30,255.28
10%
MIRR
22.63%
MIRR
16.68%
MIRR
15.58%