Internal rate of return . Internal Rate of Return (IRR): IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

Question

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Answer 1

Question

Chapter 5, Problem 10QP

a.

Summary Introduction

To determine: Internal rate of return.

Internal Rate of Return (IRR):

IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

a.

Expert Solution

Answer to Problem 10QP

Solution:

Compute the IRR.

UPENN: LOOSE LEAF CORP.FIN W/CONNECT, Chapter 5, Problem 10QP

Explanation of Solution

The excel spreadsheet is used to calculate the internal rate of return.
The IRR function is used to compute the internal rate of return.

Conclusion

Hence, internal rate of return is 12%.

b.

Summary Introduction

To explain: Whether Person X should accept this offer or not on 10% discount rate.

b.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should accept this offer on 10% discount rate.

Explanation of Solution

One should accept this offer because internal rate of return is 12% which is higher than the discount rate of 10%. It means that the current project will fetch profit for the company.

Conclusion

Hence, Person X should accept this project.

c.

Summary Introduction

To explain: Whether one should accept this offer or not on 20% discount rate.

c.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should not accept this offer on 20% discount rate.

Explanation of Solution

Person X should not accept this offer because internal rate of return is 12% which is lower than the discount rate of 20%. It means that the current project will not be able to earn even what is initially invested in the project.

Conclusion

Hence, Person X should not accept this project.

d.

Summary Introduction

To determine: NPV at 10% and 20% discount rate.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.

d.

Expert Solution

Explanation of Solution

Compute the NPV.

For discount rate of 10%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 10%.

Solution:

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 10% for r.

NPV=$4,500(1+0.1)1+$3,100(1+0.1)2+$2,400(1+0.1)3+$1,800(1+0.1)4−$9,400=$4,090.91+$2,561.98+$1,803.16+$1,229.42−$9,400=$9,685.47−$9,400=$285.47

The NPV for discount rate of 10% is $285.47.

For discount rate of 20%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 20%.

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 20% for r.

NPV=$4,500(1+0.2)1+$3,100(1+0.2)2+$2,400(1+0.2)3+$1,800(1+0.2)4−$9,400=$3,750+$2,152.78+$1,388.89+$868.06−$9,400=$8,159.73−$9,400=−$1,240.27

The NPV for discount rate of 20% is −$1,240.27.

Conclusion

Hence, NPV for discount rate of 10% and 20% is $285.47 and -$1,240.27 respectively.

e.

Summary Introduction

To explain: Whether NPV rule is consistent with IRR rule or not.

e.

Expert Solution

Answer to Problem 10QP

Solution:

Yes, NPV rule is consistent with the internal rate of return method.

Explanation of Solution

NPV rule is consistent with IRR because according to both the methods, project with 10% discount rate is accepted and project with 20% discount rate should be discarded. It is because project is giving positive return only when 10% discount rate is used otherwise it is giving negative returns and it is consistent because, only once the signs of the cash flows changes.

Conclusion

Hence, NPV is consistent with the IRR rule.

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Answer 2

Question

Chapter 5, Problem 10QP

a.

Summary Introduction

To determine: Internal rate of return.

Internal Rate of Return (IRR):

IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

a.

Expert Solution

Answer to Problem 10QP

Solution:

Compute the IRR.

UPENN: LOOSE LEAF CORP.FIN W/CONNECT, Chapter 5, Problem 10QP

Explanation of Solution

The excel spreadsheet is used to calculate the internal rate of return.
The IRR function is used to compute the internal rate of return.

Conclusion

Hence, internal rate of return is 12%.

b.

Summary Introduction

To explain: Whether Person X should accept this offer or not on 10% discount rate.

b.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should accept this offer on 10% discount rate.

Explanation of Solution

One should accept this offer because internal rate of return is 12% which is higher than the discount rate of 10%. It means that the current project will fetch profit for the company.

Conclusion

Hence, Person X should accept this project.

c.

Summary Introduction

To explain: Whether one should accept this offer or not on 20% discount rate.

c.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should not accept this offer on 20% discount rate.

Explanation of Solution

Person X should not accept this offer because internal rate of return is 12% which is lower than the discount rate of 20%. It means that the current project will not be able to earn even what is initially invested in the project.

Conclusion

Hence, Person X should not accept this project.

d.

Summary Introduction

To determine: NPV at 10% and 20% discount rate.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.

d.

Expert Solution

Explanation of Solution

Compute the NPV.

For discount rate of 10%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 10%.

Solution:

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 10% for r.

NPV=$4,500(1+0.1)1+$3,100(1+0.1)2+$2,400(1+0.1)3+$1,800(1+0.1)4−$9,400=$4,090.91+$2,561.98+$1,803.16+$1,229.42−$9,400=$9,685.47−$9,400=$285.47

The NPV for discount rate of 10% is $285.47.

For discount rate of 20%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 20%.

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 20% for r.

NPV=$4,500(1+0.2)1+$3,100(1+0.2)2+$2,400(1+0.2)3+$1,800(1+0.2)4−$9,400=$3,750+$2,152.78+$1,388.89+$868.06−$9,400=$8,159.73−$9,400=−$1,240.27

The NPV for discount rate of 20% is −$1,240.27.

Conclusion

Hence, NPV for discount rate of 10% and 20% is $285.47 and -$1,240.27 respectively.

e.

Summary Introduction

To explain: Whether NPV rule is consistent with IRR rule or not.

e.

Expert Solution

Answer to Problem 10QP

Solution:

Yes, NPV rule is consistent with the internal rate of return method.

Explanation of Solution

NPV rule is consistent with IRR because according to both the methods, project with 10% discount rate is accepted and project with 20% discount rate should be discarded. It is because project is giving positive return only when 10% discount rate is used otherwise it is giving negative returns and it is consistent because, only once the signs of the cash flows changes.

Conclusion

Hence, NPV is consistent with the IRR rule.

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Answer 3

Question

Chapter 5, Problem 10QP

a.

Summary Introduction

To determine: Internal rate of return.

Internal Rate of Return (IRR):

IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

a.

Expert Solution

Answer to Problem 10QP

Solution:

Compute the IRR.

UPENN: LOOSE LEAF CORP.FIN W/CONNECT, Chapter 5, Problem 10QP

Explanation of Solution

The excel spreadsheet is used to calculate the internal rate of return.
The IRR function is used to compute the internal rate of return.

Conclusion

Hence, internal rate of return is 12%.

b.

Summary Introduction

To explain: Whether Person X should accept this offer or not on 10% discount rate.

b.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should accept this offer on 10% discount rate.

Explanation of Solution

One should accept this offer because internal rate of return is 12% which is higher than the discount rate of 10%. It means that the current project will fetch profit for the company.

Conclusion

Hence, Person X should accept this project.

c.

Summary Introduction

To explain: Whether one should accept this offer or not on 20% discount rate.

c.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should not accept this offer on 20% discount rate.

Explanation of Solution

Person X should not accept this offer because internal rate of return is 12% which is lower than the discount rate of 20%. It means that the current project will not be able to earn even what is initially invested in the project.

Conclusion

Hence, Person X should not accept this project.

d.

Summary Introduction

To determine: NPV at 10% and 20% discount rate.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.

d.

Expert Solution

Explanation of Solution

Compute the NPV.

For discount rate of 10%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 10%.

Solution:

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 10% for r.

NPV=$4,500(1+0.1)1+$3,100(1+0.1)2+$2,400(1+0.1)3+$1,800(1+0.1)4−$9,400=$4,090.91+$2,561.98+$1,803.16+$1,229.42−$9,400=$9,685.47−$9,400=$285.47

The NPV for discount rate of 10% is $285.47.

For discount rate of 20%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 20%.

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 20% for r.

NPV=$4,500(1+0.2)1+$3,100(1+0.2)2+$2,400(1+0.2)3+$1,800(1+0.2)4−$9,400=$3,750+$2,152.78+$1,388.89+$868.06−$9,400=$8,159.73−$9,400=−$1,240.27

The NPV for discount rate of 20% is −$1,240.27.

Conclusion

Hence, NPV for discount rate of 10% and 20% is $285.47 and -$1,240.27 respectively.

e.

Summary Introduction

To explain: Whether NPV rule is consistent with IRR rule or not.

e.

Expert Solution

Answer to Problem 10QP

Solution:

Yes, NPV rule is consistent with the internal rate of return method.

Explanation of Solution

NPV rule is consistent with IRR because according to both the methods, project with 10% discount rate is accepted and project with 20% discount rate should be discarded. It is because project is giving positive return only when 10% discount rate is used otherwise it is giving negative returns and it is consistent because, only once the signs of the cash flows changes.

Conclusion

Hence, NPV is consistent with the IRR rule.

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Answer 4

Question

Chapter 5, Problem 10QP

a.

Summary Introduction

To determine: Internal rate of return.

Internal Rate of Return (IRR):

IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

a.

Expert Solution

Answer to Problem 10QP

Solution:

Compute the IRR.

UPENN: LOOSE LEAF CORP.FIN W/CONNECT, Chapter 5, Problem 10QP

Explanation of Solution

The excel spreadsheet is used to calculate the internal rate of return.
The IRR function is used to compute the internal rate of return.

Conclusion

Hence, internal rate of return is 12%.

b.

Summary Introduction

To explain: Whether Person X should accept this offer or not on 10% discount rate.

b.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should accept this offer on 10% discount rate.

Explanation of Solution

One should accept this offer because internal rate of return is 12% which is higher than the discount rate of 10%. It means that the current project will fetch profit for the company.

Conclusion

Hence, Person X should accept this project.

c.

Summary Introduction

To explain: Whether one should accept this offer or not on 20% discount rate.

c.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should not accept this offer on 20% discount rate.

Explanation of Solution

Person X should not accept this offer because internal rate of return is 12% which is lower than the discount rate of 20%. It means that the current project will not be able to earn even what is initially invested in the project.

Conclusion

Hence, Person X should not accept this project.

d.

Summary Introduction

To determine: NPV at 10% and 20% discount rate.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.

d.

Expert Solution

Explanation of Solution

Compute the NPV.

For discount rate of 10%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 10%.

Solution:

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 10% for r.

NPV=$4,500(1+0.1)1+$3,100(1+0.1)2+$2,400(1+0.1)3+$1,800(1+0.1)4−$9,400=$4,090.91+$2,561.98+$1,803.16+$1,229.42−$9,400=$9,685.47−$9,400=$285.47

The NPV for discount rate of 10% is $285.47.

For discount rate of 20%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 20%.

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 20% for r.

NPV=$4,500(1+0.2)1+$3,100(1+0.2)2+$2,400(1+0.2)3+$1,800(1+0.2)4−$9,400=$3,750+$2,152.78+$1,388.89+$868.06−$9,400=$8,159.73−$9,400=−$1,240.27

The NPV for discount rate of 20% is −$1,240.27.

Conclusion

Hence, NPV for discount rate of 10% and 20% is $285.47 and -$1,240.27 respectively.

e.

Summary Introduction

To explain: Whether NPV rule is consistent with IRR rule or not.

e.

Expert Solution

Answer to Problem 10QP

Solution:

Yes, NPV rule is consistent with the internal rate of return method.

Explanation of Solution

NPV rule is consistent with IRR because according to both the methods, project with 10% discount rate is accepted and project with 20% discount rate should be discarded. It is because project is giving positive return only when 10% discount rate is used otherwise it is giving negative returns and it is consistent because, only once the signs of the cash flows changes.

Conclusion

Hence, NPV is consistent with the IRR rule.

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Answer 5

Chapter 5, Problem 10QP

a.

Summary Introduction

To determine: Internal rate of return.

Internal Rate of Return (IRR):

IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

a.

Expert Solution

Answer to Problem 10QP

Solution:

Compute the IRR.

UPENN: LOOSE LEAF CORP.FIN W/CONNECT, Chapter 5, Problem 10QP

Explanation of Solution

The excel spreadsheet is used to calculate the internal rate of return.
The IRR function is used to compute the internal rate of return.

Conclusion

Hence, internal rate of return is 12%.

b.

Summary Introduction

To explain: Whether Person X should accept this offer or not on 10% discount rate.

b.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should accept this offer on 10% discount rate.

Explanation of Solution

One should accept this offer because internal rate of return is 12% which is higher than the discount rate of 10%. It means that the current project will fetch profit for the company.

Conclusion

Hence, Person X should accept this project.

c.

Summary Introduction

To explain: Whether one should accept this offer or not on 20% discount rate.

c.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should not accept this offer on 20% discount rate.

Explanation of Solution

Person X should not accept this offer because internal rate of return is 12% which is lower than the discount rate of 20%. It means that the current project will not be able to earn even what is initially invested in the project.

Conclusion

Hence, Person X should not accept this project.

d.

Summary Introduction

To determine: NPV at 10% and 20% discount rate.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.

d.

Expert Solution

Explanation of Solution

Compute the NPV.

For discount rate of 10%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 10%.

Solution:

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 10% for r.

NPV=$4,500(1+0.1)1+$3,100(1+0.1)2+$2,400(1+0.1)3+$1,800(1+0.1)4−$9,400=$4,090.91+$2,561.98+$1,803.16+$1,229.42−$9,400=$9,685.47−$9,400=$285.47

The NPV for discount rate of 10% is $285.47.

For discount rate of 20%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 20%.

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 20% for r.

NPV=$4,500(1+0.2)1+$3,100(1+0.2)2+$2,400(1+0.2)3+$1,800(1+0.2)4−$9,400=$3,750+$2,152.78+$1,388.89+$868.06−$9,400=$8,159.73−$9,400=−$1,240.27

The NPV for discount rate of 20% is −$1,240.27.

Conclusion

Hence, NPV for discount rate of 10% and 20% is $285.47 and -$1,240.27 respectively.

e.

Summary Introduction

To explain: Whether NPV rule is consistent with IRR rule or not.

e.

Expert Solution

Answer to Problem 10QP

Solution:

Yes, NPV rule is consistent with the internal rate of return method.

Explanation of Solution

NPV rule is consistent with IRR because according to both the methods, project with 10% discount rate is accepted and project with 20% discount rate should be discarded. It is because project is giving positive return only when 10% discount rate is used otherwise it is giving negative returns and it is consistent because, only once the signs of the cash flows changes.

Conclusion

Hence, NPV is consistent with the IRR rule.

Answer 6

Chapter 5, Problem 10QP

a.

Summary Introduction

To determine: Internal rate of return.

Internal Rate of Return (IRR):

IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

a.

Expert Solution

Answer to Problem 10QP

Solution:

Compute the IRR.

UPENN: LOOSE LEAF CORP.FIN W/CONNECT, Chapter 5, Problem 10QP

Explanation of Solution

The excel spreadsheet is used to calculate the internal rate of return.
The IRR function is used to compute the internal rate of return.

Conclusion

Hence, internal rate of return is 12%.

Answer 7

Chapter 5, Problem 10QP

a.

Summary Introduction

To determine: Internal rate of return.

Internal Rate of Return (IRR):

IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

Answer 8

a.

Expert Solution

Answer to Problem 10QP

Solution:

Compute the IRR.

UPENN: LOOSE LEAF CORP.FIN W/CONNECT, Chapter 5, Problem 10QP

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

The excel spreadsheet is used to calculate the internal rate of return.
The IRR function is used to compute the internal rate of return.

Answer 13

Conclusion

Hence, internal rate of return is 12%.

Answer 14

b.

Summary Introduction

To explain: Whether Person X should accept this offer or not on 10% discount rate.

b.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should accept this offer on 10% discount rate.

Explanation of Solution

One should accept this offer because internal rate of return is 12% which is higher than the discount rate of 10%. It means that the current project will fetch profit for the company.

Conclusion

Hence, Person X should accept this project.

Answer 15

b.

Summary Introduction

To explain: Whether Person X should accept this offer or not on 10% discount rate.

Answer 16

b.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should accept this offer on 10% discount rate.

Answer 17

b.

Expert Solution

Answer 18

b.

Expert Solution

Answer 19

Expert Solution

Answer 20

Explanation of Solution

One should accept this offer because internal rate of return is 12% which is higher than the discount rate of 10%. It means that the current project will fetch profit for the company.

Answer 21

Conclusion

Hence, Person X should accept this project.

Answer 22

c.

Summary Introduction

To explain: Whether one should accept this offer or not on 20% discount rate.

c.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should not accept this offer on 20% discount rate.

Explanation of Solution

Person X should not accept this offer because internal rate of return is 12% which is lower than the discount rate of 20%. It means that the current project will not be able to earn even what is initially invested in the project.

Conclusion

Hence, Person X should not accept this project.

Answer 23

c.

Summary Introduction

To explain: Whether one should accept this offer or not on 20% discount rate.

Answer 24

c.

Expert Solution

Answer to Problem 10QP

Solution:

Person X should not accept this offer on 20% discount rate.

Answer 25

c.

Expert Solution

Answer 26

c.

Expert Solution

Answer 27

Expert Solution

Answer 28

Explanation of Solution

Person X should not accept this offer because internal rate of return is 12% which is lower than the discount rate of 20%. It means that the current project will not be able to earn even what is initially invested in the project.

Answer 29

Conclusion

Hence, Person X should not accept this project.

Answer 30

d.

Summary Introduction

To determine: NPV at 10% and 20% discount rate.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.

d.

Expert Solution

Explanation of Solution

Compute the NPV.

For discount rate of 10%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 10%.

Solution:

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 10% for r.

NPV=$4,500(1+0.1)1+$3,100(1+0.1)2+$2,400(1+0.1)3+$1,800(1+0.1)4−$9,400=$4,090.91+$2,561.98+$1,803.16+$1,229.42−$9,400=$9,685.47−$9,400=$285.47

The NPV for discount rate of 10% is $285.47.

For discount rate of 20%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 20%.

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 20% for r.

NPV=$4,500(1+0.2)1+$3,100(1+0.2)2+$2,400(1+0.2)3+$1,800(1+0.2)4−$9,400=$3,750+$2,152.78+$1,388.89+$868.06−$9,400=$8,159.73−$9,400=−$1,240.27

The NPV for discount rate of 20% is −$1,240.27.

Conclusion

Hence, NPV for discount rate of 10% and 20% is $285.47 and -$1,240.27 respectively.

Answer 31

d.

Summary Introduction

To determine: NPV at 10% and 20% discount rate.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.

Answer 32

d.

Expert Solution

Explanation of Solution

Compute the NPV.

For discount rate of 10%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 10%.

Solution:

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 10% for r.

NPV=$4,500(1+0.1)1+$3,100(1+0.1)2+$2,400(1+0.1)3+$1,800(1+0.1)4−$9,400=$4,090.91+$2,561.98+$1,803.16+$1,229.42−$9,400=$9,685.47−$9,400=$285.47

The NPV for discount rate of 10% is $285.47.

For discount rate of 20%:

Given,

C₀ is $9,400.

CF₁ is $4,500.

CF₂ is $3,100.

CF₃ is $2,400.

CF₄ is $1,800.

r is 20%.

Formula to compute NPV,

NPV=CF1(1+r)1+CF2(1+r)2+CF3(1+r)3+CF4(1+r)4−C0

Where,

C₀ is initial investment.
CF₁ is cash inflow in first year.
CF₂ is cash inflow in second year.
CF₃ is cash inflow in third year.
CF₄ is cash inflow in fourth year.
r is discount rate.

Substitute, $9,400 for C₀, $4,500 for CF₁, $3,100 for CF₂_, $2,400 for CF₃,$1,800 for CF₄ and 20% for r.

NPV=$4,500(1+0.2)1+$3,100(1+0.2)2+$2,400(1+0.2)3+$1,800(1+0.2)4−$9,400=$3,750+$2,152.78+$1,388.89+$868.06−$9,400=$8,159.73−$9,400=−$1,240.27

The NPV for discount rate of 20% is −$1,240.27.

Answer 33

d.

Expert Solution

Answer 34

d.

Expert Solution

Answer 35

Expert Solution

Answer 36

Conclusion

Hence, NPV for discount rate of 10% and 20% is $285.47 and -$1,240.27 respectively.

Answer 37

e.

Summary Introduction

To explain: Whether NPV rule is consistent with IRR rule or not.

e.

Expert Solution

Answer to Problem 10QP

Solution:

Yes, NPV rule is consistent with the internal rate of return method.

Explanation of Solution

NPV rule is consistent with IRR because according to both the methods, project with 10% discount rate is accepted and project with 20% discount rate should be discarded. It is because project is giving positive return only when 10% discount rate is used otherwise it is giving negative returns and it is consistent because, only once the signs of the cash flows changes.

Conclusion

Hence, NPV is consistent with the IRR rule.

Answer 38

e.

Summary Introduction

To explain: Whether NPV rule is consistent with IRR rule or not.

Answer 39

e.

Expert Solution

Answer to Problem 10QP

Solution:

Yes, NPV rule is consistent with the internal rate of return method.

Answer 40

e.

Expert Solution

Answer 41

e.

Expert Solution

Answer 42

Expert Solution

Answer 43

Explanation of Solution

NPV rule is consistent with IRR because according to both the methods, project with 10% discount rate is accepted and project with 20% discount rate should be discarded. It is because project is giving positive return only when 10% discount rate is used otherwise it is giving negative returns and it is consistent because, only once the signs of the cash flows changes.

Answer 44

Conclusion

Hence, NPV is consistent with the IRR rule.

Answer 45

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 - International Investment Projects In March 2014,...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...

Internal rate of return . Internal Rate of Return (IRR): IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

Concept explainers

To determine: Internal rate of return.

Internal Rate of Return (IRR):

IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

Answer to Problem 10QP

Explanation of Solution

To explain: Whether Person X should accept this offer or not on 10% discount rate.

Answer to Problem 10QP

Explanation of Solution

To explain: Whether one should accept this offer or not on 20% discount rate.

Answer to Problem 10QP

Explanation of Solution

To determine: NPV at 10% and 20% discount rate.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.

Explanation of Solution

To explain: Whether NPV rule is consistent with IRR rule or not.

Answer to Problem 10QP

Explanation of Solution

Want to see more full solutions like this?

Chapter 5 Solutions

Internal rate of return . Internal Rate of Return (IRR): IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

Concept explainers

To determine: Internal rate of return. Internal Rate of Return (IRR): IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

Answer to Problem 10QP

Explanation of Solution

To explain: Whether Person X should accept this offer or not on 10% discount rate.

Answer to Problem 10QP

Explanation of Solution

To explain: Whether one should accept this offer or not on 20% discount rate.

Answer to Problem 10QP

Explanation of Solution

To determine: NPV at 10% and 20% discount rate. Net Present Value (NPV): Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.

Explanation of Solution

To explain: Whether NPV rule is consistent with IRR rule or not.

Answer to Problem 10QP

Explanation of Solution

Want to see more full solutions like this?

Chapter 5 Solutions

To determine: Internal rate of return.

Internal Rate of Return (IRR):

IRR is the rate at which the future cash inflows will be equal to the initial cash outflows. It is the discounting rate.

To determine: NPV at 10% and 20% discount rate.

Net Present Value (NPV):

Net present value refers to the present value of all the future cash flow that is adjusted according to the time value of money.