Fin4424 Exam 2
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1. A project has an initial
*NPV*= -$40,000 + $9,000[(1/I) - (1/(I
cost of $40,000, expected
× (1 + I)N)]
net cash inflows of $9,000
= -$40,000 + $9,000[(1/0.11) - (1/(0.11 ×
per
(1 +
year for 7 years, and a cost 0.11)7)]
of capital of 11%. What is = $2,409.77.
the project's NPV? (Hint: Financial calculator solution: Input CF0 =
Begin by constructing a -40000, CF1-7 = 9000, I/YR = 11, and
time line.) then solve for NPV = $2,409.77
What is the project's Financial calculator solution: Input CF0 =
IRR? What is the -40000, CF1-8 = 9000, and then solve for
project's MIRR? *IRR*
What is the project's PI? = 12.84%.
What is the project's
pay- back period? *mirr*
What is the project's dis- start at year zero. compound 9000
counted payback starting in year one all the way to year
period? 7, so 7 times at 12 percent.
add them up.
(9000+9900+11089+12309+13663+1516
+16834)
Financial calculator: Obtain the FVA by
inputting N = 7, I/YR = 11, PV = 0, PMT
= 9000, and
then solve for FV = $87,049. The MIRR
can be obtained by inputting N = 7, PV
= -40000, PMT
= 0, FV = 88049, and then solving for I/YR
= 11.93%.
PV = $9,000[(1/I) - (1/(I × (1 + I)N)]
= $9,000[(1/0.11) - (1/(0.11 × (1 + 0.11)7)
= $42,410.
Financial calculator: Find present value
of future cash flows by inputting N = 7,
1/
,Fin4424 Exam 2
Study online at
https://quizlet.com/_21esft I/YR = 11, PMT =
-9000, FV = 0, then solve for PV = $42,409
*PI*= PV of future cash flows/Initial cost
= $42,409/$40,000 = 1.06.
2/
, Fin4424 Exam 2
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*payback period*
Since the cash flows are a constant
$9,000, cal- culate the payback period
as: $40,000/$9,000 = 4.44, so the
payback is about 4 years.
The project's discounted payback period
is cal- culated as follows:
Year Ann Cf Discounted CF 11% Cum
Discount- ed CF
0 -40,000 -40,000.00
1 9,000 8,108.11 (31,891.89)
2 9,000 7,304.60 (24,587.29)
3 9,000 6,580.72 (18,006.57)
4 9,000 5,928.58 (12,077.99)
5 9,000 5,341.06 (6,736.93)
6 9,000 4,811.77 (1,925.16)
7 9,000 4,334.93 2,409.77
assum-
2. Your division is consider-
ing two investment pro-
jects, each of which re-
quires an up-front expen-
diture of $15 million. You
estimate that the invest-
ments will produce the
fol- lowing net cash flows:
Year Project A Project B
1 $ 5,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
What are the two projects'
net present values,
3/
, Fin4424 Exam 2
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*discounted payback
period* is 6 + years, or
6.44 years.
a. Project A: Using a
financial calculator,
enter the following:
CF0 = -15000000
CF1 = 5000000
CF2 = 10000000
CF3 = 20000000
I/YR = 10; NPV =
$12,836,213.
Change I/YR = 10 to I/YR =
5; NPV =
$16,108,952.
Change I/YR = 5 to I/YR =
15; NPV =
$10,059,587.
Project B: Using a financial
calculator, enter the
following:
CF0 = -15000000
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