Chapter 2Problem 1A firm is considering investing in a project with the following cash flows:

Year 1 2 3 4 5 6 7 8NCF 2,000 3,000 4,000 3,500 3,000 2,000 1,000 1,000 Discounted CF's $1,818.18 $2,479.34 $3,005.26 $2,390.55 $1,862.76 $1,128.95 $513.16 $466.51 $13,664.70

Info:Initial investment $12,500 discount rate 10%

Payback Period YearInitial Investment 12,500 Net cash flow (2,000) 1

10,500 Net cash flow (3,000) 2

7,500 Net cash flow (4,000) 3

3,500 Net cash flow (3,500) 4

0 Payback Period 4.00 years

NPV $13,664.70 using excel to calculateLess initial investment (12,500)NPV of Project $1,164.70 The project should be accepted.

Discounted Payback Period:Initial investment 12,500 Cash flow 1 1,818 1

10,682 Cash flow 2 2,479 1

8,202 Cash flow 3 3,005 1

5,197 Cash flow 4 2,391 1

2,807 5 1,863 1

944 6 1,129 0.84

Discounted Payback Period: 5.84 yrs.

Chapter 2Problem 4The Coin CoalitionInfo:Replace the dollar bill with a gold colored coinCost savings?

$ bill gold coinCost to produce 0.026 0.06Time it lasts 17 months 360 monthsTime it lasts 1.42 years 30 years# of $ bills that need replacing every yr 1.8 billion

a). What are the projected average annual cost savings associated with switching from thedollar bill to a dollar coin?

$ bills in to be replaced 1.8 billion gold coinsTime in circulation 1.42 yrs 30.00 yrs Time in circulation 30.00 yrs

$ bills in circulation 2.550 billion How many $ bills to be replaced annually 2.550

gold coins to be replaced 85.00 million gold coins to be replaced 85.00cost per 0.026 0.06 cost per 0.06

46.8 million cost of replacing 85 million gold coins 5.1 mil '(85x.06)cost of replacing 85 million gold coins 5.1 million

46.85.1

annual cost savings if use gold coins 41.7 million

b). Taking into account only the cost savings estimated in part a, how high can the start up costsfor this replacement project be and still yield a positive NPV?Use an 8% discount rate(not actually finding NPV of cost savings)

Cost savings 41,700,000 Adiscount rate 0.08 B

$521,250,000 A/B

As long as the start up costs are no more than $521.25 million, the project will yield a positive NPV

Start up costs for switching? Unknown, but could be quite high

1.8 bills to be replaced x 1.42 yrs in cir.

you calculate how many coins need to be replaced each year

2.55/30*1000 (mil)

cost of replacing 1.8 billion at 2.6 cents per ($)

Chapter 2Problem 8The Fast Food Chain

Info:Initial investment $400,000 cost of capital 15%

CF's given Year

Plan 1 2 3 4 5S $250 $250 $150 $100 $50 L 100 125 200 250 125

a. Construct NPV profilesDiscount Rate 15% 15%

Yr S L0 (400) (400)

1 250 100 2 250 125 3 150 200 4 100 250 5 50 125

NPV 187.09 118.06 IRR 39.28% 25.63% Plan S has the higher IRR

b. Which plan should be chosen using the NPV method?Plan S has the higher NPV

c. Which plan (S or L) should be chosen & why?

Under either criteria, choose plan S, higher NPV, higher IRR

d. At what cost of capital will the NPV and the IRR rankings conflict?

To find this, you calculate the discount rate that makes the PV of the differences in the CF's zero.

Discount Rate 15% 15% 0%Yr S L diff0 (400) (400) 0

1 250 100 150 2 250 125 125 3 150 200 (50)4 100 250 (150)5 50 125 (75)

NPV 187.09 118.06 0.00 IRR 39.28% 25.63% 0%

PV = 0, when the discount rate = 0NPV & IRR give identical recommendations.