# Finance Questions: NPV and IRR, Payback, calculate the NPVs for 2 projects, Profitability Index and more...

(See attached file for full problem description)

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Problem 7-9

NPV and IRR. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years.

Is this project worth pursuing if the discount rate is 10 percent?

Project NPV

How high can the discount rate be before you would reject the project?

Maximum Project Rate

Problem 7-10

Payback. A project that costs $2,500 to install will provide annual cash flows of $600 for the

next 6 years. The firm accepts projects with payback periods of less than 5 years.

Will the project be accepted?

Project payback period

Should this project be pursued if the discount rate is 2 percent?

NPV of Project at 2%

What if the discount rate is 12 percent?

NPV of Project at 12%

Will the firm's decision change as the discount rate changes?

Problem 7-19

Here are the cash flows for two mutually exclusive projects:

Project C0 C1 C2 C3

A ($20,000) $8,000 $8,000 $8,000

B ($20,000) 0 0 $25,000

Use the MS Excel NPV function to calculate the NPVs for both projects in the profile below. In part B use the IRR function.

a. At what interest rates would you prefer project A to B?

NPV Profile

Discount

Rate NPVA NPVB

0% FORMULA FORMULA

2% FORMULA FORMULA

4% FORMULA FORMULA

6% FORMULA FORMULA

8% FORMULA FORMULA

10% FORMULA FORMULA

12% FORMULA FORMULA

14% FORMULA FORMULA

16% FORMULA FORMULA

18% FORMULA FORMULA

20% FORMULA FORMULA

b. What is the IRR of each project?

Project A IRR

Project B IRR

Problem 7-23

Profitability Index. Consider the following projects:

Project C0 C1 C2

A (2,100.00) 2,000.00 1,200.00

B (2,100.00) 1,440.00 1,728.00

a. Calculate the profitability index for A and B assuming a 22 percent opportunity cost of capital.

Project A NPV

Project B NPV

Project A Profitability Index

Project B Profitability Index

b. Use the profitability index rule to determine which project(s) you should accept (i) if you

could undertake both and (ii) if you could undertake only one.

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