Finance Work
Chapter 17 Problem Questions 2,4,5
2. Find the NPV and PI of an annuity that pays $500 per year for eight years and costs $2,500. Assume a discount rate of 6 percent. $500*8)*0.94^8-2,500
($4,000)*0.6095-2,500
2438-2,500=-$62.00
Your NPV is -$62.00 PI:
PV / Cost ($3104.90 / $2500) 1.24196 The PI is 1.24196. 4. Find the IRR and MIRR of a project if it has estimated cash flows of $5,500 annually for seven years if its year zero’s investment is $25,000.
PV of $5,500 = initial investment = $25,000 let IRR = r
PV of $5,500 = = 25,000
solving it in we get
IRR = r = 12%
MIRR = - 1 FV of in flow with rate of IRR = = 5500((1.12)^7 - 1 )/0.12 = $55489.56
MIRR = - 1= 1.12 06= 0.1206 therefore MIRR = 12.06%
5. For the following projects, compute NPV, IRR, MIRR, profitability index, and payback. If these projects are mutually exclusive, which one(s) should be done? If they are independent, which one(s) should be undertaken? a. b. c. d. Year 0 – 1,000 –1,500 –500 –2,000 Year 1 400 500 100 600 Year 2 400 500 300 800 Year 3 400 700 250 200 Year 4 400 200 200 300 Discount rate 10% 12% 15% 8% NPV of project A =-1000 + 400/1.1 + 400/1.1^2 + 400/1.1^3 + 400/1.1^4 =$267.946
PI of Project A =( 400/1.1 + 400/1.1^2 + 400/1.1^3 + 400/1.1^4)/1000 =1.268
NPV of Project B = -1,500 +500/1.12 +500/1.12^2 + 700/1.12^3 + 200/1.12^4 =-29.6247
PI of Project B =(500/1.12 +500/1.12^2 + 700/1.12^3 + 200/1.12^4 )/1500 =0.980
NPV of Project C =-500 +100/1.15 + 300/1.15^2 +250/1.15^3 + 200/1.15^4 =92.529
PI of Project C =(100/1.15 + 300/1.15^2 +250/1.15^3 + 200/1.15^4)/500 =1.1851
NPV of Project D =-2000+ 600/1.08 + 800/1.08^2 + 200/1.08^3+ 300/1.08^4
2. Find the NPV and PI of an annuity that pays $500 per year for eight years and costs $2,500. Assume a discount rate of 6 percent. $500*8)*0.94^8-2,500
($4,000)*0.6095-2,500
2438-2,500=-$62.00
Your NPV is -$62.00 PI:
PV / Cost ($3104.90 / $2500) 1.24196 The PI is 1.24196. 4. Find the IRR and MIRR of a project if it has estimated cash flows of $5,500 annually for seven years if its year zero’s investment is $25,000.
PV of $5,500 = initial investment = $25,000 let IRR = r
PV of $5,500 = = 25,000
solving it in we get
IRR = r = 12%
MIRR = - 1 FV of in flow with rate of IRR = = 5500((1.12)^7 - 1 )/0.12 = $55489.56
MIRR = - 1= 1.12 06= 0.1206 therefore MIRR = 12.06%
5. For the following projects, compute NPV, IRR, MIRR, profitability index, and payback. If these projects are mutually exclusive, which one(s) should be done? If they are independent, which one(s) should be undertaken? a. b. c. d. Year 0 – 1,000 –1,500 –500 –2,000 Year 1 400 500 100 600 Year 2 400 500 300 800 Year 3 400 700 250 200 Year 4 400 200 200 300 Discount rate 10% 12% 15% 8% NPV of project A =-1000 + 400/1.1 + 400/1.1^2 + 400/1.1^3 + 400/1.1^4 =$267.946
PI of Project A =( 400/1.1 + 400/1.1^2 + 400/1.1^3 + 400/1.1^4)/1000 =1.268
NPV of Project B = -1,500 +500/1.12 +500/1.12^2 + 700/1.12^3 + 200/1.12^4 =-29.6247
PI of Project B =(500/1.12 +500/1.12^2 + 700/1.12^3 + 200/1.12^4 )/1500 =0.980
NPV of Project C =-500 +100/1.15 + 300/1.15^2 +250/1.15^3 + 200/1.15^4 =92.529
PI of Project C =(100/1.15 + 300/1.15^2 +250/1.15^3 + 200/1.15^4)/500 =1.1851
NPV of Project D =-2000+ 600/1.08 + 800/1.08^2 + 200/1.08^3+ 300/1.08^4