8-1 Solutions to Chapter 8 Net Present Value and Other Investment ...

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Chapter 08 - Net Present Value and Other Investment Criteria29. a. The following table shows the NPV profile of the project. NPV is zero at an interestrate between 7% and 8%, and it is also equal to zero at an interest rate between 33%and 34%. These are the two IRRs of the project. You can use your calculator toconfirm that the two IRRs are, more precisely, 7.16% and 33.67% (as shown belowthe table).DiscountDiscountNPVRateRateNPV0.00 –2.00 0.21 0.820.01 –1.62 0.22 0.790.02 –1.28 0.23 0.750.03 –0.97 0.24 0.710.04 –0.69 0.25 0.660.05 –0.44 0.26 0.600.06 –0.22 0.27 0.540.07 –0.03 0.28 0.470.08 0.14 0.29 0.390.09 0.29 0.30 0.320.10 0.42 0.31 0.240.11 0.53 0.32 0.150.12 0.62 0.33 0.060.13 0.69 0.34 –0.030.14 0.75 0.35 –0.130.15 0.79 0.36 –0.220.16 0.83 0.37 –0.320.17 0.85 0.38 –0.420.18 0.85 0.39 –0.530.19 0.85 0.40 –0.630.20 0.84 0.41 –0.74$20 $20 $20 $40NPV $22 341.0716 (1.0716) (1.0716) (1.0716)2$20 $20 $20 $40NPV $22 341.3367 (1.3367) (1.3367) (1.3367)b. At 5% the NPV is:2$20 $20 $20 $40NPV $22 $0.4432 341.05 1.05 1.05 1.05Since the NPV is negative, the project is not attractive.c. At 20% the NPV is:$20 $20 $20 $40NPV $22 341.20 1.20 1.20 1.20Since the NPV is positive, the project is attractive.2$0.840$0.00$0.008-12
Chapter 08 - Net Present Value and Other Investment CriteriaAt 40% the NPV is:$20 $20 $20 $40NPV $22 $0.6342 341.40 1.40 1.40 1.40Since the NPV is negative, the project is not attractive.d. At a low discount rate, the positive cash flows ($20 for 3 years) are not discountedvery much. However, the final cash flow of negative $40 does not get discountedvery heavily either. The net effect is a negative NPV.At very high rates, the positive cash flows are discounted very heavily, resulting in anegative NPV. For moderate discount rates, the positive cash flows that occur in themiddle of the project dominate and project NPV is positive.Est time: 11–158-13
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8-1 Solutions to Chapter 8 Net Present Value and Other Investment ...

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