1
Introduction: The variability between present value of all
To compute: The payback period for both the projects.
1
Answer to Problem 7.23P
Payback periods for A is 6.53 years and B is 7.03 years
Explanation of Solution
Annual net cash inflow
| Particular | Product A | Product B |
| Sales Revenue | 250000 | 350000 |
| Less: Variable Cost | (120000) | (170000) |
| Fixed out of pocket and operating cost | (70000) | (50,000) |
| Annual net cash inflows | 130 |
2
Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal
To compute: The net present value of each project.
2
Answer to Problem 7.23P
The net present value for A is ($88,750) and B
Explanation of Solution
Net present value for A:
| Years | Net cash inflows (a) $ | PV of $1 factor (i=16%) (b) | Present value of net cash inflow |
| 1 | 26000 | 0.847 | 22022 |
| 2 | 26000 | 0.718 | 18668 |
| 3 | 26000 | 0.608 | 15808 |
| 4 | 26000 | 0.515 | 13390 |
| 5 | 26000 | 0.437 | 11362 |
| Present value of net cash inflows | 81250 | ||
| Less: initial cost of investment | 170000 | ||
| Net present value | 88750 | ||
The net present value for the project is ($88,750) and B is ($211,260).
Net present value for B:
| Years | Net cash inflows (a) $ | PV of $1 factor (i=16%) (b) | Present value of net cash inflow |
| 1 | 54,000 | 0.847 | 45,728 |
| 2 | 54,000 | 0.718 | 38,772 |
| 3 | 54,000 | 0.608 | 32,832 |
| 4 | 54,000 | 0.515 | 27,810 |
| 5 | 54,000 | 0.437 | 23,598 |
| Present value of net cash inflows | 168,740 | ||
| Less: initial cost of investment | 380,000 | ||
| Net present value | 211,260 | ||
The net present value for the project is ($211,260)
3
Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.
Theinternal rate of return of each project.
3
Answer to Problem 7.23P
The internal rate of return for A is 11% and B is 13%
Explanation of Solution
Factor of the internet rate of return for A:
According to exhibit 7B-2, the rate of return closest to the factor 6.53 is 11%
Factor of the internet rate of return for B:
According to exhibit 7B-2, the rate of return closest to the factor 7.03 is 13%
4.
Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.
To compute: The profitability index for both the projects.
4.
Answer to Problem 7.23P
The profitability index for project A is 0.522 and B is 0.55
Explanation of Solution
Net present value for A:
| Years | Net cash inflows (a) $ | PV of $1 factor (i=16%) (b) | Present value of net cash inflow |
| 1 | 26000 | 0.847 | 22022 |
| 2 | 26000 | 0.718 | 18668 |
| 3 | 26000 | 0.608 | 15808 |
| 4 | 26000 | 0.515 | 13390 |
| 5 | 26000 | 0.437 | 11362 |
| Present value of net cash inflows | 81250 | ||
| Less: initial cost of investment | 170000 | ||
| Net present value | 88750 | ||
Profitability index:
Net present value for B:
| Years | Net cash inflows (a) $ | PV of $1 factor (i=16%) (b) | Present value of net cash inflow |
| 1 | 54,000 | 0.847 | 45,728 |
| 2 | 54,000 | 0.718 | 38,772 |
| 3 | 54,000 | 0.608 | 32,832 |
| 4 | 54,000 | 0.515 | 27,810 |
| 5 | 54,000 | 0.437 | 23,598 |
| Present value of net cash inflows | 168,740 | ||
| Less: initial cost of investment | 380,000 | ||
| Net present value | 211,260 | ||
Profitability index:
5
Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.
Themost preferably ranking methods.
5
Answer to Problem 7.23P
Net present value is focused only the amount of investment
Explanation of Solution
Net operating income is $400000 and initial investment is $3500000
Simple rate of return A:
Simple rate of return is 15.29%
Simple rate of return B:
Simple rate of return for B is 14.21%
6
Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.
Theproject which L should pursue.
6
Answer to Problem 7.23P
Both the project should be rejected
Explanation of Solution
The net present value of both the investment is positive and its internal rate of return is 17%. However the calculated simple rate of return of A is $15.29% and B is 14.21% which is less than the expected
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Chapter 7 Solutions
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