Solution to Projects

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Chapter 8 INVESTMENT CRITERIA 1.(a) NPV of the project at a discount rate of 14%. 100,000 200,000 = - 1,000,000 + ---------- + ------------ (1.14) (1.14)2 300,000 600,000 300,000 + ----------- + ---------- + ---------- (1.14)3 (1.14)4 (1.14)5 = - 44837 (b) NPV of the project at time varying discount rates = - 1,000,000 100,000 + (1.12) 200,000 + (1.12) (1.13) 300,000 + (1.12) (1.13) (1.14) 600,000 + (1.12) (1.13) (1.14) (1.15) 300,000 + (1.12) (1.13)…show more content…
In such cases, the IRR rule breaks down. 5. Define NCF as the minimum constant annual net cashflow that justifies the purchase of the given equipment. The value of NCF can be obtained from the equation NCF x PVIFA (10%,8) = 500000 NCF = 500000 / 5.335 = 93271 6. Define I as the initial investment that is justified in relation to a net annual cash inflow of 25000 for 10 years at a discount rate of 12% per annum. The value of I can be obtained from the following equation 25000 x PVIFA (12%,10) = I i.e., I = 141256 7. PV of benefits (PVB) = 25000 x PVIF (15%,1) + 40000 x PVIF (15%,2) + 50000 x PVIF (15%,3) + 40000 x PVIF (15%,4) + 30000 x PVIF (15%,5) = 122646 (A) Investment = 100,000 (B) Benefit cost ratio = 1.23 [= (A) / (B)] 8. The NPV’s of the three projects are as follows: Project P Q R Discount rate 0% 400 500 600 5% 223 251 312 10% 69 40 70 15% - 66 - 142 - 135 25% - 291 - 435 - 461 30% - 386 - 555 - 591 9. NPV profiles for Projects P and Q for selected discount rates are as follows: (a) Project P Q Discount rate (%) 0 2950 500 5 1876 208 10
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