Capitulo 9 economia, ejercicios ed. 12

( Solutions to Problems

Note to instructor: In most problems involving the IRR calculation, a financial calculator has been used.

P9-1. LG 2: Payback period
Basic
a. $42,000 ( $7,000 ’ 6 years
b. The company should accept the project, since 6 < 8.

P9-2. LG 2: Payback comparisons
Intermediate
a. Machine 1: $14,000 ( $3,000 ’ 4 years, 8 monthsMachine 2: $21,000 ( $4,000 ’ 5 years, 3 months
b. Only Machine 1 has a payback faster than 5 years and is acceptable.
c. The firm will accept the first machine because the payback period of 4 years, 8 months is
less than the 5-year maximum payback required by Nova Products.
d. Machine 2 has returns that last 20 years while Machine 1 has only seven years of returns.Payback cannot consider this difference; it ignores all cash inflows beyond the payback period. In this case, the total cash flow from Machine 1 is $59,000 ($80,000 − $21,000) less than Machine 2.

P9-3. LG 2: Choosing between two projects with acceptable payback periods
Intermediate
a.

| |Project A | | |Project B|
| |Cash |Investment | | |Cash |Investment |
|Year |Inflows |Balance | |Year |Inflows |Balance |
|0 | |−$100,000 | |0 | |−$100,000 |
|1 |$10,000 |−90,000| |1 |40,000 |−60,000 |
|2 |20,000 |−70,000 | |2 |30,000 |−30,000 |
|3 |30,000 |−40,000 | |3 |20,000 |−10,000 |
|4 |40,000 |0 | |4 |10,000 |0|
|5 |20,000 | | |5 |20,000 | |


Both Project A and Project B have payback periods of exactly 4 years.
b. Based on the minimum payback acceptance criteria of 4 years set by John Shell, both projects should be accepted. However, since they are mutually exclusive projects, Johnshould accept Project B.
c. Project B is preferred over A because the larger cash flows are in the early years of the project. The quicker cash inflows occur, the greater their value.
P9-4 LG4: Personal finance: Long-term investment decisions, payback period
a. and b.

| |Project A |Project B|
| |Annual Cash Flow |Cumulative Cash Flow |Annual Cash Flow |Cumulative |
|Year | | | |Cash Flow |
|0 |$(9,000) |$(9,000) |$(9,000) |$(9,000) |
|1 |2,00 |(6,800)|1,500 |(9,000) |
|2 |2,500 |(4,300) |1,500 |(6,000) |
|3 |2,500 |(1,800) |1,500 |(4,500) |
|4 |2,000 | |3,500 |(1,000) |
|5|1,800 | |4,000 | |
|Total Cash Flow |11,000 | |12,000 | |
|Payback Period |3 + 1,800/2,000 = 3.9 years |4 + 1,000/4,000 = 4.25 years |


c. The payback method would select Project A since its payback...