Chapter 6 Review Problems Solutions

    1. (a) Final Balance = -$1225, so this investment earns more than 10% effective      (b) Final Balance = $1300, so this investment earns less than 20% effective      (c) Final Balance = $0, so this investment earns exactly 15% effective
    1. (a) NPV = $1,012.40      (b) NPV = -$902.78      (c) NPV = $0
  3. NPV = -$3,861.76.  The deal does not earn 10% effective MARR.
    1. (a) NPV = -$198.90 at 15% effective. The company does not achieve its objective.      (b) The NPV of the cash flows using i = 20% effective is -$5,138.88. To earn 20%, the NPV must = $0. Therefore, the size of the bonus must be $5,138.89 to have a net project cost of $54,861.11 instead of $60,000.
  5. NPV = $135,994.73
    1. (a) NPV = -$9,985.01 at 12% effective and IRR = 6.8305% for this three year project.      (b) To earn 15% effective, NPV must = $0. Without the subsidy, the NPV at 15% is -$15,101.18. This is the PV of the required subsidy at the end of the third year. Therefore, the subsidy = future value of this amount at 15% in three years or $22,967.01.
  7. NPV = $664,371.70. This is the amount PA can afford to bid.
  8. IRR = 12.7118%
  9. NPV at 15% effective = $6,150.15. TQ will make more than 15% effective. IRR = 19.6004%
  10. NPV = $9,076.27;   IRR = 17.29597% effective.
  11. NPV = $22,476.94 IRR = 10.5635%
  12. NPVs are $100,000, $118,896.51, and $122,241.28, respectively. Offer #3 is the most attractive one at 9% effective.
  13. A 10% bond implies that if the bond is purchased for $1,000, it will generate $100 annual interest, and the bondholder will receive the $1,000 bond investment back at the end of the ninth year. To solve this problem, find the PV of nine annual cash flows of $100 and the $1,000 paid at the end of the ninth year using the target interest rate.     a. $761.42 b.         $1,000.00        c.         $1,355.39
  14. NPV = $5,375.37. Yes, the company should purchase the equipment.
  15. NPV for A is $39,162.96 NPV for B is $8,508.47.  Location A has the higher NPV at 16% effective.
    1. (a) 4+136/297 years = 4.46 years      (b) -$17,152.42 ? No, because the NPV is negative.      (c) The NPV is +$1,111.42, which is above zero, so you should open a kennel.      (d) $17,152.42      (e) minimum selling price is $255,000 + $33,025.52 = $288,026      (f) 12.12%, No, because the IRR is below the minimum acceptable rate of return of 14%.
    1. (a) 4+30/170 = 4.176 years      (b) $16,263.94 Yes, buy the business because the NPV is positive (earning more than 16% per year).      (c) Purchase price could increase by up to $16,263.94 to $136,264.      (d) Lowest selling price you could accept is $95,840.      (e) 19.45%/year. This exceeds the required rate of 16%/year so buy business.      (f) Up to a $4,967.16/year decrease in revenue.
    1. (a) NPV = +$6408 .24       (b) IRR = 16.73%      (c) Yes, undertake the business plan because the NPV is positive and the IRR is 16.73%, which exceeds the minimum required return of 15%.      (d) $100,000-$14,822.65=$85,177 is the minimum selling price for the business.
    1. (a) -$18,573.73      (b) 14.77%      (c) No, because the NPV is negative and the IRR = 14.77% < MARR of 20%.      (d) $70,000 + $115,004 = $185,004 is the minimum selling price.
    1. (a) 17.25% > 15% MARR, so yes, invest.      (b) +$19,413.74. Yes, since the NPV is positive.      (c) $210,952 (rounded to nearest dollar)      (d) $5,791.42/year
    1. (a) 4.25 years, so no, it is longer than 4 years.      (b) 9.95% is below 15%, so no, do not invest.      (c) -$134,086.89, which is below zero; therefore, do not invest      (d) $24,000/year
    • (a) NPV =+$7,979.31; yes, undertake the project because the NPV is positive    (b) IRR = 14.58% exceeds the MARR of 14%      (c) 6.57 years      (d) $80,000 -\33,722.42 =$46,277.58 is the minimum salvage value.
    • (a) NPV = -$198.90; no, the company does not achieve its objective.      (b) The bonus must be $5,138.89 to make the NPV equal zero
    1. (a) Project X: 20.8%   Project Y: 17.3% Project X has the higher IRR and should be selected.      (b) NPV: Project X: $66,712   Project Y: $58,720 Project X has the higher NPV and should be selected.      (c) NPV:  Project X: $100,085  Project Y: $117,751 Project Y now has the higher NPV and should be selected.

 

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