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Net Present Value
Net Present Value
initial outlay of $100,000 and will generate net cash inflows of $18,000 per year for 10 years.
a. What is the project’s NPV using a discount rate of 12 percent? Should the project be accepted? Why or why no
b. What is the project’s NPV using a discount rate of 13 percent? Should the project be accepted? Why or why no
c. What is this project’s IRR? Should the project be accepted? Why or why not?
12%
Time Cashflows PV
0 -100000 -100000 ₹ 1,704.01 =D10+NPV(k,D11:D20)
1 18000 16071.43 Accept
2 18000 14349.49 NPV>0
3 18000 12812.04
4 18000 11439.33
5 18000 10213.68 ₹ -2,327.62 =D10+NPV(13%,D11:D20)
6 18000 9119.36 Reject
7 18000 8142.286 NPV<0
8 18000 7269.898
9 18000 6490.98 IRR 12.41%
10 18000 5795.518 IRR (12.41%) > Required rate of return (12%)
1704.015 Accept
a NPV at 12 ₹ 1,704.01 IRR and NPV will give similar results in conventional c
Since the NPV is positive in this case, Big Steve would want to accept the project.
b NPV at 13 ₹ -2,327.62
Thus at 13%, the project is not acceptable, since its NPV is negative.
c IRR 12.41%
We can’t tell by simply looking at this IRR whether or not this project is acceptable.
Instead, we must compare the IRR to Big Steve’s cost of capital. If its cost of capital is less than 12.41%, t
if the discount rate is greater than 12.41%, however, the project should be rejected.
plastic-stamping machine. This investment will require an
years.
e accepted? Why or why not?
e accepted? Why or why not?
V(k,D11:D20)
V(13%,D11:D20)
Eclipse Sabre
a. NPV -1,591,171 -1,010,735
If these alternatives were directly comparable, we would want to choose the one with the smaller negative NPV
However, these projects have different lives, and therefore are not perfectly comparable.
b. Eclipse Sabre
NPV -1,591,171 -1,010,735
rate 12% 12%
Life 10 5
PVIFA (12%,10) 5.65
PVIFA (12%,5) 3.604776202345
EAC NPV/PVIFA NPV/PVIFA
-281612.094594327 -280387.6141863
Thus choosing the Sabre model means an equivalent annual cost of -$280,388, while the Eclipse’s EAC is -$281,
Since the Sabre model provides the conveyor services at a lower EAC, Templeton should choose it over the Ecli
any of Tacoma, Washington, is contemplating the purchase of a new conveyor belt system for one of
complish the same task, but the Eclipse model will cost substantially more than the Sabre model and
to be replaced in just 5 years. The costs of purchasing the two systems and the costs of operating them
n typically evaluates investments in plant improvements using a 12 percent required rate of return. What are the NPVs for t
e the EACs for the two systems.
your analysis of the two systems using both their NPVs and their EACs, which system do you recommend that the company
12%
₹ 280,387.61
3.604776202345
₹ -280,387.61
one with the smaller negative NPV (that is, the one with the lower present value of costs), the Sabre model.
comparable.
a Investment -10000
nper 10
pmt 1993
IRR 15.01%
using rate function
b Investment -10000
nper 20
pmt 2054
IRR 20.00%
using rate function
c Investment -10000
nper 12
pmt 1193
IRR 6.00%
using rate function
d Investment -10000
nper 5
pmt 2843
IRR 13.00%
using rate function
he IRRs for the following projects:
ng in a cash inflow of $1,993 at the end of each year for the next 10 years
ting in a cash inflow of $2,054 at the end of each year for the next 20 years
ting in a cash inflow of $1,193 at the end of each year for the next 12 years
ting in a cash inflow of $2,843 at the end of each year for the next 5 years
Time
OR Alternatively 0
1
IRR 15.0063% 2
=RATE(C11,C12,C10) using IRR function 3
4
5
6
7
8
9
=RATE(C18,C19,C17,,,15%) 10
=RATE(C25,C26,C24,,,15%)
=RATE(C31,C32,C30,,,15%)
CF
-10000
1993
1993
1993
1993
1993
1993
1993
1993
1993
1993
11–12. (Calculating IRR and NPV) (Related to Checkpoint 11.1 on page 367 and Checkpoint 11.4 on page 376)
are as follows:
MIRR
Time Project OuProject inf Net CFs 10% 12% 14%
0 -10 0 -10 -13.10461 -12.83713 -12.59684
1 3 3 3 3 3
2 3 3 3 3 3
3 3 3 3 3 3
4 3 3 3 3 3
5 -5 3 -2 3 3 3
6 5 5 5 5 5
7 5 5 5 5 5
8 5 5 5 5 5
9 5 5 5 5 5
10 5 5 5 5 5
MIRR 23.60% 24.18% 24.72%
Note that the project has a second cash outflow at t = 5. We will discount that cash flow back to t = 0, add it to the
Using rates of 10%, 12%, and 14% to discount the t = 5 cash flow, we find the results above.
er Mania is considering building a new indoor soccer facility
million and will generate annual cash inflows of $3 million
tional investment outlay of $5,000,000. During Years 6
he project’s MIRR, given the following:
ow back to t = 0, add it to the initial outflow of $10 million, and then find the project’s modified IRR (MIRR).
11–19. (Calculating NPV, PI, and IRR) (Related to Checkpoint 11.1 on page 367 and Checkpoint 11.4 on page 37
selling product line and has estimated the following cash flows associated with the expansion. The initial outlay w
of $1,250,000 per year for 20 years. The appropriate discount rate is 9 percent.
a. Calculate the NPV.
b. Calculate the PI.
c. Calculate the IRR.
d. Should this project be accepted? Why or why not?
10, 682
1.0565.
00, 000
10, 682
1.0565.
00, 000
Year Project A Project B Project C a. Given Bar-None’s three-year payback period, which of the pr
b. Rank the three projects using their payback periods. Which p
0 -1,000 -10,000 -5,000 or why not? c. If Bar-None uses a 10 percent discount rate to an
1 600 5,000 1,000 projects? If the firm still maintains its three-year payback policy
2 300 3,000 1,000
3 200 3,000 2,000
4 100 3,000 2,000
5 500 3,000 2,000
discount rate 0.1
Project A Project B
Year CF Cum CF DiscCF CumDCF CF Cum CF DiscCF
0 -1,000 -1,000 -1000 -1,000 -10,000 -10,000 -10000
1 600 -400 545.4545 -455 5,000 -5,000 4545.455
2 300 -100 247.9339 -207 3,000 -2,000 2479.339
3 200 100 150.263 -56 3,000 1,000 2253.944
4 100 200 68.30135 12 3,000 4,000 2049.04
5 500 700 310.4607 322 3,000 7,000 1862.764
ect B Project C
CumDCF CF Cum CF DiscCF CumDCF
-10,000 -5,000 -5,000 -5000 -5,000
-5,455 1,000 -4,000 909.0909 -4,091
-2,975 1,000 -3,000 826.4463 -3,264
-721 2,000 -1,000 1502.63 -1,762
1,328 2,000 1,000 1366.027 -396
3,191 2,000 3,000 1241.843 846
11–25. (Using NPV for mutually exclusive projects) You have been assigned the task of evaluating two mutually
projected cash flows:
Project A Cash
Year Project B Cash Flow
Flow
0 -100,000 -100,000
1 33,000 0
2 33,000 0
3 33,000 0
4 33,000 0
5 33,000 220,000
If the appropriate discount rate on these projects is 10 percent, which would be chosen and why?
Since these projects are mutually exclusive, we would choose the one that has the higher (positive) NPV: project B.
evaluating two mutually exclusive projects with the following
nd why?
NPV: project B.