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CAPITAL BUDGETING PROBLEMS: CHAPTER 10 Answers to Warm-Up Exercises E10-1. Answer: Payback period The payback period for Project Hydrogen is 4.29 years. The payback period for Project Helium is 5.75 years. Both projects are acceptable because their payback periods are less than Elysian Fields’ maximum payback period criterion of 6 years.

Answer: NPV Year Cash Inflow 1 2 3 4 5 $400,000 375,000 300,000 350,000 200,000 Total NPV $1,389,677.35 Present Value $ 377,358.49 333,748.67 251,885.78 277,232.78 149,451.63 $1,389,677.35 $1,250,000 $139,677.35 Herky Foods should acquire the new wrapping machine. CAPITAL BUDGETING PROBLEMS: CHAPTER 10 E10-3: Answer: NPV comparison of two projects Project Kelvin Present value of expenses Present value of cash inflows PV) NPV –$45,000 51,542 (PMT $20,000, N 3, I 8, Solve for $ 6,542 Project Thompson Present value of expenses $275,000 Present value of cash inflows 277,373 (PMT $60,000, N 6, I 8, Solve for PV) NPV $ 2,373 Based on NPV analysis, Axis Corporation should choose an overhaul of the existing system. E10-4: Answer: IRR You may use a financial calculator to determine the IRR of each project. Choose the project with the higher IRR. Project T-Shirt PV 15,000, N Solve for I IRR 39.08% 4, PMT 8,000 Project Board Shorts PV 25,000, N 5, PMT 12,000 Solve for I IRR 38.62% Based on IRR analysis, Billabong Tech should choose project T-Shirt. E10-5: Answer: NPV Note: The IRR for Project Terra is 10.68% while that of Project Firma is 10.21%.

Furthermore, when the discount rate is zero, the sum of Project Terra’s cash flows exceed that of Project Firma. Hence, at any discount rate that produces a positive NPV, Project Terra provides the higher net present value. CAPITAL BUDGETING PROBLEMS: CHAPTER 10 P10-3. Choosing between two projects with acceptable payback periods LG 2; Intermediate a. Year 0 1 2 3 4 5 Project A Cash Investment Inflows Balance $10,000 20,000 30,000 40,000 20,000 Year 0 1 2 3 4 5 $100,000 90,000 70,000 40,000 0 Project B Cash Investment Inflows Balance 40,000 30,000 20,000 10,000 20,000 $100,000 60,000 30,000 10,000 0 Both Project A and Project B have payback periods of exactly 4 years. Based on the minimum payback acceptance criteria of 4 years set by John Shell, both projects should be accepted. However, since they are mutually exclusive projects, John should accept Project B.

Managerial finance pdf

Project B is preferred over A because the larger cash flows are in the early years of the project. The quicker cash inflows occur, the greater their value. Personal finance: Long-term investment decisions, payback period LG 4 a. Year Project A Annual Cumulative Cash Flow Cash Flow 0 1 2 3 4 5 Total Cash Flow Payback Period $(9,000) 2,00 2,500 2,500 2,000 1,800 11,000 3 1,800/2,000 Project B Annual Cumulative Cash Flow Cash Flow $(9,000) (6,800) (4,300) (1,800) 3.9 years 4 $(9,000) 1,500 1,500 1,500 3,500 4,000 12,000 1,000/4,000 $(9,000) (7,500) (6,000) (4,500) (1,000) 4.25 years The payback method would select Project A since its payback of 3.9 years is lower than Project B’s payback of 4.25 years. One weakness of the payback method is that it disregards expected future cash flows as in the case of Project B. CAPITAL BUDGETING PROBLEMS: CHAPTER 10 P10-5.

NPV LG 3; Basic NPV PVn Initial investment a. N 20, I 14%, PMT $2,000 Solve for PV $13,246.26 NPV $13,246.26 $10,000 NPV $3,246.26 Accept project b. N 20, I 14%, PMT Solve for PV NPV NPV Reject c. N 19,869.39 $19,869.39 $25,000 $5,130.61 20, I 14%, PMT Solve for PV NPV NPV NPV Accept $3,000 $5,000 $33,115.65 $33,115.65 $33,115.65 $3,115 $30,000 P10-6. NPV for varying cost of capital LG 3; Basic a. 10% N 8, I 10%, PMT $5000 Solve for PV $26,674.63 NPV PVn Initial investment NPV $26,674.63 $24,000 NPV $2,674.63 Accept; positive NPV b.

12% N 8, I 12%, PMT $5,000 Solve for PV $24,838.20 NPV PVn Initial investment NPV $24,838.20 $24,000 NPV $838.20 Accept; positive NPV CAPITAL BUDGETING PROBLEMS: CHAPTER 10 P10-8. NPV LG 3; Challenge a. N 5, I 9%, PMT $385,000 Solve for PV $1,497,515.74 The immediate payment of $1,500,000 is not preferred because it has a higher present value than does the annuity. N 5, I 9%, PV $1,500,000 Solve for PMT $385,638.69 c. Present valueAnnuity Due PVordinary annuity (1 discount rate) $1,497,515.74 (1.09) $1,632,292 Calculator solution: $1,632,292 Changing the annuity to a beginning-of-the-period annuity due would cause Simes Innovations to prefer to make a $1,500,000 one-time payment because the present value of the annuity due is greater than the $1,500,000 lump-sum option. No, the cash flows from the project will not influence the decision on how to fund the project.

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The investment and financing decisions are separate. NPV and maximum return LG 3; Challenge a. N 4, I 10%, PMT $4,000 Solve for PV $12,679.46 NPV PV Initial investment NPV $12,679.46 $13,000 NPV –$320.54 Reject this project due to its negative NPV. N 4, PV -$13,000, PMT $4,000 Solve for I 8.86% 8.86% is the maximum required return that the firm could have for the project to be acceptable.

Since the firm’s required return is 10% the cost of capital is greater than the expected return and the project is rejected. NPV—mutually exclusive projects LG 3; Intermediate a. Press A CF0 -$85,000; CF1 $18,000; F1 Set I 15% Solve for NPV -$4,228.21 Reject 8 CAPITAL BUDGETING PROBLEMS: CHAPTER 10 Press B CF0 -$60,000; CF1 $12,000; CF2 CF5 $20,000; CF6 $25,000 Set I 15% Solve for NPV $2,584.34 Accept $14,000; CF3 $16,000; CF4 Press C CF0 -$130,000; CF1 $50,000; CF2 $30,000; CF3 $20,000; CF4 CF5 $20,000; CF6 $30,000; CF7 $40,000; CF8 $50,000 Set I 15% Solve for NPV $15,043.89 Accept c. $18,000; $20,000; Ranking—using NPV as criterion Rank 1 2 3 Press C B A NPV $15,043.89 2,584.34 4,228.21 d. Profitability Indexes Profitability Index Present Value Cash Inflows Press A: $80,771 $85,000 0.95 Press B: $62,588 $60,000 1.04 Press C: $145,070 $130,000 Investment 1.12 e. The profitability index measure indicates that Press C is the best, then Press B, then Press A (which is unacceptable).

This is the same ranking as was generated by the NPV rule. Personal finance: Long-term investment decisions, NPV method LG 3 Key information: Cost of MBA program $100,000 Annual incremental benefit $ 20,000 Time frame (years) 40 Opportunity cost 6.0% Calculator Worksheet Keystrokes: CF0 100,000 CF1 20,000 F1 40 Set I 6% Solve for NPV $200,926 The financial benefits outweigh the cost of the MBA program. CAPITAL BUDGETING PROBLEMS: CHAPTER 10 P10-14. IRR—Mutually exclusive projects LG 4; Intermediate IRR is found by solving: $0 n t 1 CFt (1 IRR)t initial investment Most financial calculators have an ―IRR‖ key, allowing easy computation of the internal rate of return. The numerical inputs are described below for each project. Project A CF0 $90,000; CF1 $20,000; CF2 $25,000; CF3 $30,000; CF4 $35,000; CF5 Solve for IRR 17.43% If the firm’s cost of capital is below 17%, the project would be acceptable. $40,000 Project B CF0 $490,000; CF1 $150,000; CF2 $150,000; CF3 $150,000; CF4 $150,000 or, CF0 $490,000; CF1 $150,000, F1 4 Solve for IRR 8.62% The firm’s maximum cost of capital for project acceptability would be 8.62%.

Jan 29, 2005 - On this 1987, manual start motor, note the shift lever in neutral & the black plastic. Off eBay a 1987 15hp Johnson motor for $76 that was sold as 'needing repair/for parts'. Cheaper units, made from 1988 to 1991. Lookup Johnson J15RCCS 1988 15hp parts by boat engine section and buy discount parts from our large online inventory. Search by model number, brand, year and horsepower to find the service manual/operators guide that fits your exact Evinrude or Johnson outboard motor. 9.9/15 HORSEPOWER. R, RL, RH, RHL. This Operator's Guide is an essential part of your Johnson outboard. Ator's Manual applies conforms to the essential re- quirements. 15 – 15 HP (11.2 kw) @ 6000 RPM. 1988 johnson 15 hp manual. Mar 5, 2018 - All 15 hp motors for both Johnson and Evinrude were called 15hp. However another reader said his plug codes were good at 1988. In Europe, at least from 1979 to 1983 manual start 9.9hp motors uses a lanyard man.

Project C CF0 $20,000; CF1 $7500; CF2 $7500; CF3 $7500; CF4 $7500; CF5 $7500 or, CF0 $20,000; CF1 $7500; F1 5 Solve for IRR 25.41% The firm’s maximum cost of capital for project acceptability would be 25.41%. Project D CF0 $240,000; CF1 $120,000; CF2 $100,000; CF3 $80,000; CF4 $60,000 Solve for IRR 21.16% The firm’s maximum cost of capital for project acceptability would be 21% (21.16%).

IRR—Mutually exclusive projects LG 4; Intermediate a. Project X $0 $100,000 (1 IRR)1 $120,000 (1 IRR)2 $150,000 (1 IRR)3 $190,000 (1 IRR)4 $250,000 (1 IRR)5 $500,000 CF0 -$500,000; CF1 $100,000; CF2 $120,000; CF3 $150,000; CF4 CF5 $250,000 Solve for IRR 15.67; since IRR cost of capital, accept. $190,000 Project Y $0 $140,000 (1 IRR)1 $120,000 (1 IRR)2 $95,000 (1 IRR)3 $70,000 (1 IRR)4 $50,000 (1 IRR)5 $325,000 CAPITAL BUDGETING PROBLEMS: CHAPTER 10 CF0 $325,000; CF1 $140,000; CF2 $120,000; CF3 $95,000; CF4 CF5 $50,000 Solve for IRR 17.29%; since IRR cost of capital, accept.

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$70,000 Project Y, with the higher IRR, is preferred, although both are acceptable. Personal Finance: Long-term investment decisions, IRR method LG 4; Intermediate IRR is the rate of return at which NPV equals zero Computer inputs and output: N 5, PV $25,000, PMT $6,000 Solve for IRR 6.40% Required rate of return: 7.5% Decision: Reject investment opportunity P10-17. IRR, investment life, and cash inflows LG 4; Challenge a. N 10, PV -$61,450, PMT $10,000 Solve for I 10.0% The IRR cost of capital; reject the project. I 15%, PV $61,450, PMT $10,000 Solve for N 18.23 years The project would have to run a little over 8 more years to make the project acceptable with the 15% cost of capital. N 10, I 15%, PV $61,450 Solve for PMT $12,244.04 P10-18. NPV and IRR LG 3, 4; Intermediate a.

N 7, I 10%, PMT $4,000 Solve for PV $19,473.68 NPV PV Initial investment NPV $19,472 $18,250 NPV $1,223.68 b. N 7, PV $18,250, PMT $4,000 Solve for I 12.01% c. The project should be accepted since the NPV 0 and the IRR the cost of capital. CAPITAL BUDGETING PROBLEMS: CHAPTER 10 P10-20. All techniques, conflicting rankings LG 2, 3, 4: Intermediate a.

Year 0 1 2 3 4 5 6 Project A Cash Investment Inflows Balance $45,000 45,000 45,000 45,000 45,000 45,000 Payback A $150,000 $45,000 Payback B 2 years Year $150,000 105,000 60,000 15,000 30,000 3.33 years 0 1 2 3 4 Project B Cash Investment Inflows Balance $75,000 60,000 30,000 30,000 30,000 30,000 $150,000 75,000 15,000 15,000 0 3 years 4 months $15,000 years 2.5 years $30,000 2 years 6 months b. At a discount rate of zero, dollars have the same value through time and all that is needed is a summation of the cash flows across time.

NPVA ($45,000 6) - $150,000 $270,000 $150,000 $120,000 NPVB $75,000 $60,000 $120,000 $150,000 $105,000 c. NPVA: CF0 $150,000; CF1 $45,000; F1 Set I 9% Solve for NPVA $51,886.34 6 NPVB: CF0 $150,000; CF1 $75,000; CF2 Set I 9% Solve for NPV $51,112.36 Accept d.

IRRA: CF0 $150,000; CF1 $45,000; F1 Solve for IRR 19.91% IRRB: CF0 $150,000; CF1 $75,000; CF2 Solve for IRR 22.71% $60,000; CF3 $120,000 $60,000; CF3 $120,000 6 CAPITAL BUDGETING PROBLEMS: CHAPTER 10 e. Project A B Payback Rank NPV IRR 2 1 1 2 2 1 The project that should be selected is A. The conflict between NPV and IRR is due partially to the reinvestment rate assumption. The assumed reinvestment rate of Project B is 22.71%, the project’s IRR. The reinvestment rate assumption of A is 9%, the firm’s cost of capital. On a practical level Project B may be selected due to management’s preference for making decisions based on percentage returns and their desire to receive a return of cash quickly.

Payback, NPV, and IRR LG 2, 3, 4; Intermediate a. Payback period Balance after 3 years: $95,000 $20,000 $25,000 $30,000 $20,000 3 ($20,000 $35,000) 3.57 years b. NPV computation CF0 $95,000; CF1 $20,000; CF2 $25,000; CF3 $30,000; CF4 $35,000 CF5 $40,000 Set I 12% Solve for NPV $9,080.60 c.

$0 $20,000 (1 IRR)1 $25,000 (1 IRR)2 $30,000 (1 IRR)3 CF0 $95,000; CF1 $20,000; CF2 CF5 $40,000 Solve for IRR 15.36% $35,000 (1 IRR) 4 $25,000; CF3 $40,000 (1 IRR) 5 $30,000; CF4 $95,000 $35,000 d. NPV $9,080; since NPV 0; accept IRR 15%; since IRR 12% cost of capital; accept The project should be implemented since it meets the decision criteria for both NPV and IRR. NPV, IRR, and NPV profiles LG 3, 4, 5; Challenge a. Project A CF0 $130,000; CF1 $25,000; CF2 $35,000; CF3 $45,000 CF4 $50,000; CF5 $55,000 Set I 12% NPVA $15,237.71 Based on the NPV the project is acceptable since the NPV is greater than zero. Solve for IRRA 16.06% CAPITAL BUDGETING PROBLEMS: CHAPTER 10 Project B CF0 $85,000; CF1 $40,000; CF2 $35,000; CF3 $30,000 CF4 $10,000; CF5 $5,000 Set I 12% NPVB $9,161.79 Based on the NPV the project is acceptable since the NPV is greater than zero. Solve for IRRB 17.75% Based on the IRR the project is acceptable since the IRR of 17.75% is greater than the 12% cost of capital.

Managerial Finance By Gitman Solution Manual

Data for NPV Profiles NPV Discount Rate 0% 12% 15% 16% 18% A $80,000 $15,238 — 0 — B $35,000 $9,161 $ 4,177 — 0 d. The net present value profile indicates that there are conflicting rankings at a discount rate less than the intersection point of the two profiles (approximately 15%). The conflict in rankings is caused by the relative cash flow pattern of the two projects. At discount rates above approximately 15%, Project B is preferable; below approximately 15%, Project A is better. Based on Thomas Company’s 12% cost of capital, Project A should be chosen. Project A has an increasing cash flow from Year 1 through Year 5, whereas Project B has a decreasing cash flow from Year 1 through Year 5. Cash flows moving in opposite directions often cause conflicting rankings.

Managerial Finance Gitman Answers

The IRR method reinvests Project B’s larger early cash flows at the higher IRR rate, not the 12% cost of capital. CAPITAL BUDGETING PROBLEMS: CHAPTER 10 P10-23. All techniques—decision among mutually exclusive investments LG 2, 3, 4, 5, 6; Challenge Cash inflows (years 1 5) a. IRR. A $20,000 3 years $10,345 19.86% Project B $ 31,500 3.2 years $ 10,793 17.33% C $ 32,500 3.4 years $ 4,310 14.59%.

Managerial Finance Pdf

Supporting calculations shown below: a. Payback Period: Project A: $60,000 $20,000 Project B: $100,000 $31,500 Project C: $110,000 $32,500 b.

NPV Project A CF0 $60,000; CF1 $20,000; F1 5 Set I 13% Solve for NPVA $10,344.63 Project B CF0 $100,000; CF1 $31,500; F1 5 Set I 13% Solve for NPVB $10,792.78 Project C CF0 $110,000; CF1 $32,500; F1 5 Set I 13% Solve for NPVC $4,310.02 c. IRR Project A CF0 $60,000; CF1 $20,000; F1 5 Solve for IRRA 19.86% Project B CF0 $100,000; CF1 $31,500; F1 5 Solve for IRRB 17.34% Project C CF0 $110,000; CF1 $32,500; F1 5 Solve for IRRC 14.59% 3 years 3.2 years 3.4 years CAPITAL BUDGETING PROBLEMS: CHAPTER 10 Project B Payback period $50,000 $15,000 3.33 years b. Project A CF0 $80,000; CF1 $15,000; CF2 $20,000; CF3 CF5 $35,000 Set I 13% Solve for NPVA $3,659.68 Project B CF0 $50,000; CF1 $15,000; F1 5 Set I 13% Solve for NPVB $2,758.47 c. Project A CF0 $80,000; CF1 $15,000; CF2 $20,000; CF3 CF5 $35,000 Solve for IRRA 14.61% Project B CF0 $50,000; CF1 $15,000; F1 5 Solve for IRRB 15.24% $25,000; CF4 $30,000; $25,000; CF4 $30,000.