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Chapter 10 Homework key The problem number from the book are 4 th edition numbers. I’ve edited the questions as indicated on the assignment web page. Also note that there may still be present values values in the key shown using P factors from tables. I e!pect you to do the problems with your calculator and show your calculator inputs and the result. ".

A pro#ect has the following cash flows $% $" $& ()*%%+ )&%% ),%% a. -hat is the pro#ect’s payback period b. $alculate the pro#ects /P at "&0. c. $alculate the pro#ect’s I11 

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SOLUTION: a. The cumulative cash flow is 2ear % " & ' $ash 3low ()*%%+ )&%% ),%% )&44 $umulative ()*%%+ (),%%+ % )&44 $umulative cash flow is ero after two years5 hence the payback period is two years.

 b 6 c.

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2ear 2ear $3i % ()*%%+ " )&%% & ),%% ' )&44 I "&0 b. $ompute /P 7 ),%.84 c. $ompute I11 7 "9.%'0 $lancy Inc. is considering a pro#ect with the following cash flows. $% $" $& $' ()*:8%%+ )&:'%% )':,%% )4:",' a. $lancy has a policy of re#ecting all pro#ects that don’t pay back within three years outright: and analying those that do more carefully with time value based methods. ;oes this pro#ect warrant further consideration b. &%%%?4",' &%%%?4",' 7 &.48+. @ence $lancy’s policy would require further evaluation using time value based methods.

 b. and c. The pro#ect’s /P at 80 is calculated as follows 2ear $3i % ()*:8%%+ " )&:'%% & )':,%% ' )4:",' I 80 compute /P 7 ) 9&*."% compute I11 7 "&.%0 The pro#ect has a positive /P which implies that it should be accepted. The I11 is "&0: which is above the cost of capital of 80. Therefore the investment should be accepted. ,.

@amstring Inc. is considering a pro#ect with the following cash flows $% ()&,:%%%+

$" )"%:%%%

$& )"&:%%%

$' ),:%%%

$4 )8:%%%

The company is reluctant to consider pro#ects with paybacks of more than three years. If pro#ects  pass the payback screen: they are considered further by means of the /P and I11 methods. The firmBs cost of capital is C0. a. -hat is the pro#ectBs payback period