Student Name: Zipeng Chen

Course Name: Introduction to Managerial Finance

Student ID: 17411381
Course Number: MGMT 109

Chapter 5 Quiz Prep Problems

1. Payback
a. Payback Period for each project
A: -5000+1000+1000+3000=0
Answer: 3 years
B: -1000+0+1000=0
Answer: 2 years
C: -5000+1000+1000+3000+0.2*5000=0
Answer: 3.2 years
b. I would accept project B
c. I would accept project A or B.
d. NPV of each project
A: NPV= -5000+1000/(1+0.1)+1000/(1+0.1)^2+3000/(1+0.1)^3+0= -1010.5 < 0
B: NPV= -1000+0+1000/(1+0.1)^2+2000/(1+0.1)^3+3000/(1+0.1)^4= 3378 > 0
C: NPV= NPV of A + 5000/(1+0.1)^4= 2404.5 > 0
Project B and C have positive NPVs
e. True. Not all projects have the same payback period, some projects may be cut off before
they can generate significant cash flow.
f. No, it will not accept any negative NPV projects, because the initial outlay will not be fully
repaid by the projects’ future cash flow. It may turn down some positive NPV projects if they
don’t meet the cutoff period.
2. Payback
a. NPV of each project
A: -1000+1000/1.1= -90.9 < 0
B: -2000+1000/1.1+1000/1.1^2+4000/1.1^3+1000/1.1^4+1000/1.1^5= 4045 > 0
C: -3000+1000/1.1+1000/1.1^2+0+1000/1.1^4+1000/1.1^5= 39.5 > 0
Projects B and C have positive NPVs.

b, Payback Period
A: -1000+1000=0
1 Year
B: -2000+1000+1000=0
2 Years
C: -3000+1000+1000+0+1000=0
4 Years
c. The firm would accept Project A and B. (If the firm doesn’t use NPV or discounted payback
rule)

5. IRR
a. (1) when r=0
NPV=-6750+4500+18000=15750
(2) when r=50%
NPV=-6750+4500/1.5+18000/1.5^2=4250
(3) when r=100%
NPV=-6750+4500/2+18000/2^2=0
b. The IRR is 100%, because at this value the NPV is 0.
6. IRR
-3000+3500/(1+IRR)+4000/(1+IRR)^2-4000/(1+IRR)^3=0
Solving the equation, assuming IRR is positive, we get IRR=45.3%
For NPV to stay positive, IRR needs to be smaller than 45.3%

7. Just by looking at the rate, the IRR is 13%, bigger than the discount rate 10%, I would accept
the offer.
However, the NPV at IRR of 13% is:
5000+4000/1.13-11000/1.13^2=-74
The NPV at discount rate of 10% is
5000+4000/1.1-11000/1.1^2=-454.5
The present value of the project is negative, and the project will result in a cash outflow in
two years. I would decline the offer.

15. Profitability Index

a. Project D: 8182/10000=0.8182
Project E: 11818/20000=0.5909
b. Since both projects are mutually exclusive, the project with a higher profitability index is
superior. It has more NPV with a relatively smaller investment cost.