3 rules hw solutions uiowe35y

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Fin 3322

Investment Rules Homework

1. You are considering the following two mutually exclusive projects that will not berepeated. The required rate of return is 11.25 for project ! and 1".#5 for

project $. %hich project should you accept and why&

Year 'roject ! 'roject $ " ()*+,""" ()12-,"" 1 )1+,*"" ) -,#"" 2 )/1,/"" ) +","" / )11,#"" ) "

A PV A B PV B

0 -48,000 -48,000 -126,00 -126,00

1 18,400 16,!3 6,"00 62,3!

2 31,300 2!,20 80,00 6!,!"3 11,"00 8,4" 0 0

#PV 2,326 #PV 1,2

$%oose Pro&e't A (s it %(s t%e %i)%er #PV

2. $ased on the profitability index 0' rule, should a project with the following cashflows be accepted if the discount rate is + & %hy or why not&

Year 3ash 4low

" ()1+,-"" 1 )1",""" 2 ) #,/"" / ) /,#""

Year Cash flow PV A

0 -18,600 -18,600

1 10,000 9,259

2 7,300 6,259

3 3,700 2,937

NPV -145

PV of cash flows 18,455

PI 0.992

Re&e't t%e *ro&e't (s t%e PI is less t%(n one



/. ac6 is considering adding toys to his general store. 7e estimates that the cost of inventory will be )*,2"". The remodeling expenses and shelving costs areestimated at )1,5"". Toy sales are expected to produce net cash inflows of )1,2"", )1,5"", )1,-"", )1,#5", and )2,""" over the next five years,respectively. 8hould ac6 add toys to his store if he assigns a three(year paybac6

period to this project& %hat is the 9': of adding toys, if the discount rate is+&

+%e initi(l in'rement(l 'osts (re 4,200 1,!00 !,"00

.e(r 1 !,"00-1,200 4,!00

.e(r 2 4,!00-1,!00 3,000

.e(r 3 3,000-1,600 1,400

.e(r 4 1,400 / 1,"!0 080

P(('k is 38 e(rs re&e't t%e *ro&e't

0 1 2 3 4 !

#et (les 1200 1!00 1600 1"!0 2000

$osts -!"00

PV -!,"00 1,11111 1,28601 1,2"013 1,28630 1,3611"

#PV 614"2

*. ! project has an initial cost of )/+,""" and a four(year life. The company usesstraight(line depreciation to a boo6 value of ;ero over the life of the project. The

projected net income from the project is )1,""", )1,2"", )1,5"", and )1,#"" ayear for the next four years, respectively. %hat is the average accounting return&

Year 0 1 2 3 4 Ae AA!

Ne"

I#co$e 1,000 1,200 1,500 1,700 1,350

%oo& 38,000 28,500 19,000 9,500 0 19,000 7.11'

5. <iven the following cash flows for project => 3" ? (2,""", 31 ? -"", 32 ? 2,1-" and

3/ ? -,""", calculate the discounted paybac6 period for the project at a discount

rate of 2".

Year 0 1 2 3

C( -2,000 600 2,160 6,000

PV -2,000.00 500.00 1,500.00 3,472.22

5is'ounte P(('k is 2 e(rs

-. @lephant company is investing in a giant crane. t is expected to cost 2.2 million in



initial investment and it is expected to generate an end of year cash flow of 1."million each year for three years, and then be sold for scrap for ".5 million.3alculate the AA approximately.

# 3

I/. 7PV -22

P+ 1

FV 0!

I/. 2!239

#.! $ 3 B @ 4 <

5 . " * . " 5 . " 1 . " 2 . " # . " + . " n i t i a l i n v e s t m e n t

1 . 5 ( " . 5 1 . " " . 5 " . 5 1 . " 1 . " 9 ' :

The firm has only twenty million to invest. %hat is the maximum 9': that thecompany can obtain&

RA#:I#;

A PI 6! / ! 13 2

B PI 3! / 4 088 "

$ PI 6 / ! 12 4

5 PI 1! / 1 1! 1

< PI 2!/2 12! 3

F PI 8 / " 114 !

; PI / 8 113 6

+(ke *ro&e't 5, A, <, $, (n F$ost= 1 ! 2 ! " 20 #PV= 0! 1! 0! 1 1 4!

3 rules hw solutions uiowe35y

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