Adequate information: Year Cash Flows 0 $8,700 1 -$3,900 2 -$2,900 3 -$2,300 4 -$1,800 To compute: The internal rate of return (IRR) of the offer. Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

Question

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Answer 1

Question

Chapter 5, Problem 10QAP

a.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute: The internal rate of return (IRR) of the offer.

Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

b.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 10%

To determine: Whether the offer should be accepted if the appropriate discount rate is 10%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

c.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 20%

To compute: Whether the offer should be accepted if the appropriate discount rate is 20%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

d.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute:

The net present value (NPV) of the offer if the appropriate discount rate is 10%.

The net present value (NPV) of the offer if the appropriate discount rate is 20%.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

e.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To explain: Whether the decisions under the NPV rule are consistent with those of the IRR rule.

Introduction:

The Internal Rate of Return (IRR) is the discount rate that will equate the present value of the cash inflows to the present value of the cash outflows.

The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows of a proposal.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

Answer 2

Question

Chapter 5, Problem 10QAP

a.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute: The internal rate of return (IRR) of the offer.

Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

b.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 10%

To determine: Whether the offer should be accepted if the appropriate discount rate is 10%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

c.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 20%

To compute: Whether the offer should be accepted if the appropriate discount rate is 20%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

d.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute:

The net present value (NPV) of the offer if the appropriate discount rate is 10%.

The net present value (NPV) of the offer if the appropriate discount rate is 20%.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

e.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To explain: Whether the decisions under the NPV rule are consistent with those of the IRR rule.

Introduction:

The Internal Rate of Return (IRR) is the discount rate that will equate the present value of the cash inflows to the present value of the cash outflows.

The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows of a proposal.

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Answer 3

Question

Chapter 5, Problem 10QAP

a.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute: The internal rate of return (IRR) of the offer.

Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

b.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 10%

To determine: Whether the offer should be accepted if the appropriate discount rate is 10%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

c.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 20%

To compute: Whether the offer should be accepted if the appropriate discount rate is 20%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

d.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute:

The net present value (NPV) of the offer if the appropriate discount rate is 10%.

The net present value (NPV) of the offer if the appropriate discount rate is 20%.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

e.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To explain: Whether the decisions under the NPV rule are consistent with those of the IRR rule.

Introduction:

The Internal Rate of Return (IRR) is the discount rate that will equate the present value of the cash inflows to the present value of the cash outflows.

The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows of a proposal.

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Answer 4

Question

Chapter 5, Problem 10QAP

a.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute: The internal rate of return (IRR) of the offer.

Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

b.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 10%

To determine: Whether the offer should be accepted if the appropriate discount rate is 10%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

c.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 20%

To compute: Whether the offer should be accepted if the appropriate discount rate is 20%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

d.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute:

The net present value (NPV) of the offer if the appropriate discount rate is 10%.

The net present value (NPV) of the offer if the appropriate discount rate is 20%.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

e.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To explain: Whether the decisions under the NPV rule are consistent with those of the IRR rule.

Introduction:

The Internal Rate of Return (IRR) is the discount rate that will equate the present value of the cash inflows to the present value of the cash outflows.

The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows of a proposal.

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Answer 5

Chapter 5, Problem 10QAP

a.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute: The internal rate of return (IRR) of the offer.

Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

b.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 10%

To determine: Whether the offer should be accepted if the appropriate discount rate is 10%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

c.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 20%

To compute: Whether the offer should be accepted if the appropriate discount rate is 20%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

d.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute:

The net present value (NPV) of the offer if the appropriate discount rate is 10%.

The net present value (NPV) of the offer if the appropriate discount rate is 20%.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

e.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To explain: Whether the decisions under the NPV rule are consistent with those of the IRR rule.

Introduction:

The Internal Rate of Return (IRR) is the discount rate that will equate the present value of the cash inflows to the present value of the cash outflows.

The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows of a proposal.

Answer 6

Chapter 5, Problem 10QAP

a.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute: The internal rate of return (IRR) of the offer.

Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

Answer 7

Chapter 5, Problem 10QAP

a.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute: The internal rate of return (IRR) of the offer.

Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net cash inflows is equal to the aggregate present value of net cash outflows of the project.

Answer 8

b.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 10%

To determine: Whether the offer should be accepted if the appropriate discount rate is 10%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

Answer 9

b.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 10%

To determine: Whether the offer should be accepted if the appropriate discount rate is 10%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

Answer 10

c.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 20%

To compute: Whether the offer should be accepted if the appropriate discount rate is 20%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

Answer 11

c.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

Appropriate discount rate = 20%

To compute: Whether the offer should be accepted if the appropriate discount rate is 20%.

Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.

Answer 12

d.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute:

The net present value (NPV) of the offer if the appropriate discount rate is 10%.

The net present value (NPV) of the offer if the appropriate discount rate is 20%.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

Answer 13

d.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To compute:

The net present value (NPV) of the offer if the appropriate discount rate is 10%.

The net present value (NPV) of the offer if the appropriate discount rate is 20%.

Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of cash outflow.

Answer 14

e.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To explain: Whether the decisions under the NPV rule are consistent with those of the IRR rule.

Introduction:

The Internal Rate of Return (IRR) is the discount rate that will equate the present value of the cash inflows to the present value of the cash outflows.

The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows of a proposal.

Answer 15

e.

Summary Introduction

Adequate information:

Year Cash Flows
0 $8,700
1 -$3,900
2 -$2,900
3 -$2,300
4 -$1,800

To explain: Whether the decisions under the NPV rule are consistent with those of the IRR rule.

Introduction:

The Internal Rate of Return (IRR) is the discount rate that will equate the present value of the cash inflows to the present value of the cash outflows.

The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows of a proposal.

Answer 16

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Answer 17

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Answer 18

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Answer 19

Ch. 5 - Payback Period and Net Present Value If a project...Ch. 5 - Net Present Value Suppose a project has...Ch. 5 - Comparing Investment Criteria Define each of the...Ch. 5 - Payback and Internal Rate of Return A project has...Ch. 5 - Prob. 5CQ Ch. 5 - Capital Budgeting Problems What are some of the...Ch. 5 - Prob. 7CQ Ch. 5 - Prob. 8CQ Ch. 5 - Net Present Value versus Profitability Index...Ch. 5 - Internal Rate of Return Projects A and B have the...

Solution Summary: The author calculates the internal rate of return (IRR) of the offer by using the Excel IRR function.

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Chapter 5 Solutions

Year	Cash Flows
0	$8,700
1	-$3,900
2	-$2,900
3	-$2,300
4	-$1,800