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Solution to Projects

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Submitted By vaibhav1534
Words 2318
Pages 10
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) (1.14)(1.15)(1.16)

= - 1,000,000 + 89286 + 158028 + 207931 + 361620 + 155871 = - 27264

2. Investment A

a) Payback period = 5 years b) NPV = 40000 x PVIFA (12%,10) – 200 000 = 26000
c) IRR (r ) can be obtained by solving the equation: 40000 x PVIFA (r, 10) = 200000 i.e., PVIFA (r, 10) = 5.000

From the PVIFA tables we find that

PVIFA (15%,10) = 5.019 PVIFA (16%,10) = 4.883

Linear interporation in this range yields

r = 15 + 1 x (0.019 / 0.136) = 15.14%

d) BCR = Benefit Cost Ratio = PVB / I = 226,000 / 200,000 = 1.13

Investment B

a) Payback period = 9 years

b) NP V = 40,000 x PVIFA (12%,5) + 30,000 x PVIFA (12%,2) x PVIF (12%,5) + 20,000 x PVIFA (12%,3) x PVIF (12%,7)
- 300,000

= (40,000 x 3.605) + (30,000 x 1.690 x 0.567) + (20,000 x 2.402 x 0.452) – 300,000 = - 105339

c) IRR (r ) can be obtained by solving the equation 40,000 x PVIFA (r, 5) + 30,000 x PVIFA (r, 2) x PVIF (r,5) + 20,000 x PVIFA (r, 3) x PVIF (r, 7) = 300,000

Through the process of trial and error we find that r = 1.37%

d) BCR = PVB /…...

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