chpt09

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File: document.xls Copyright © 1997 Richard D. Irwin, Inc. Printed: 04/07/2023

Financial Analysis Spreadsheet TemplatesMAIN MENU -- CHAPTER 9

Problem 9-3 Problem 9-6 Problem 9-7

Problem 9-9 Problem 9-12 Problem 9-15

Problem 9-18 Problem 9-23

Fundamentals of Corporate Finance by Ross, Westerfield, and Jordan -- Fifth EditionCopyright © 2000 Irwin/McGraw-Hill and KMT Software, Inc. (www.kmt.com)

Main Menu


Financial Analysis Spreadsheet TemplatesMAIN MENU -- CHAPTER 9

Fundamentals of Corporate Finance by Ross, Westerfield, and Jordan -- Fifth EditionCopyright © 2000 Irwin/McGraw-Hill and KMT Software, Inc. (www.kmt.com)


Fundamentals of Corporate FinanceRoss, Westerfield, and Jordan -- Fifth Edition

Problem 9-3 ObjectiveCalculate the payback period of a project.

Student Name: Course Name: Student ID: Course Number:

Offshore Drilling Products Inc, imposes a payback cutoff of 3 years for its international investment projects. If the company has the following two projects available, should they accept either of them?

Cash Cash Year Flow (A) Flow (B)

0 ($30,000) ($45,000)1 15,000 5,0002 10,000 10,0003 10,000 20,0004 5,000 250,000

SolutionInstructionsEnter formulas to calculate the cumulative cash flows and then calculate the payback period foreach investment.

Investment A Investment BCash Cumulative Cash Cumulative

Year Flow Cash Flow Flow (B) Cash Flow0 ($30,000) ($45,000)1 $15,000 $5,000 2 $10,000 FORMULA $10,000 FORMULA3 $10,000 FORMULA $20,000 FORMULA4 $5,000 FORMULA $250,000 FORMULA

Payback Period (years)

What-if AnalysisInstructionsClick one of the scenario buttons to see the "what if" question. With each scenario, refer back to the original data of the problem. Solve the scenario question by utilizing the payback template given below. Be sure to print your results before moving on to the next scenario.

What-if:(Scenario 1)Cash Cash

Year Flow (A) Flow (B)0 ($30,000) ($50,000)1 10,000 10,0002 10,000 15,0003 5,000 60,0004 5,000 250,000

Student's "What-if" Solution

Scenario 1 Investment A Investment BCash Cumulative Cash Cumulative


Payback Period (years) FORMULA

Scenario 2 Investment A Investment BCash Cumulative Cash Cumulative


Payback Period (years) FORMULA



Problem 9-6 ObjectiveCalculate Average Accounting Return using the Excel AVERAGE function.


You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The following projections apply:

Plant installation cost = $14,000,000Straight-line depreciation

Projected Year Net Income

1 $1,741,000 2 1,628,0003 1,301,0004 1,000,000

What is the Average Accounting Return (AAR)?

SolutionInstructionsEnter data and use the Excel AVERAGE function to calculate the AAR. Also use the SLN function to calculate depreciation.

Installation cost

Year 1 2 3 4Beginning BVAnnual depreciation FORMULAAccumulated depreciation #VALUE! #VALUE! #VALUE!Ending Book Value #VALUE! #VALUE! #VALUE! #VALUE!

AAR FORMULA

What-if AnalysisInstructionsClick one of the scenario buttons to see the "what if" question. With each scenario, refer back to the original data of the problem. Solve the scenario question by utilizing the AAR template given below. Be sure to print your results before moving on to the next scenario.

What-if: (Scenario 1)The initial investment was only $10,000,000

Student's "What-if" Solution

Scenario 1

Installation cost


AAR FORMULA

Scenario 2Projected

Year Net Income1 $1,000,000 2 1,200,000 3 1,300,000 4 900,000

Installation cost


AAR #VALUE!

Scenario 1

(Scenario 1)The initial investment was on 10000000

Scenario 2

(Scenario 2)The net income was projected as follows:

Projected Year Net Income

1 10000002 12000003 13000004 900000



Problem 9-7 ObjectiveCalculate IRR using the Excel IRR function.


A firm evaluates all of its projects by applying the IRR rule. If the required return is 18 percent, should the firm accept the following project?

Year Cash Flow0 ($30,000)1 25,000 2 0 3 15,000

SolutionInstructionsUse the Excel IRR function to calculate the Internal Rate of Return on this project.

Internal rate of return FORMULA



Problem 9-9 ObjectiveCalculate Net Present Value and Internal Rate of Return using Excel financial functions.


A project that provides annual cash flows of $400 for eight years costs $1,500 today. Is this a good project if the required return is 8 percent? What if it’s 24 percent? At what discount rate would you be indifferent between accepting the project and rejecting it?

SolutionInstructionsUse the PV function to calculate the NPV of the project at the two required rates of return. Then use the IRR function to calculate the projects internal rate of return.

Annual cash flow $400 Cost $1,500 Life (years) 8

8% 24%Required Required

rate of return rate of returnNet Present Value FORMULA FORMULA

Internal rate of return FORMULA

Year Cash Flow0 ($1,500)1 400 2 400 3 400 4 400 5 400 6 400 7 400 8 400



Problem 9-12 ObjectiveCalculate Net Present Value and Internal Rate of Return using Excel financial functions.

Student Name: faadmaCourse Name: financeStudent ID: 1111Course Number: 01

Real Estate Solutions, Inc. has identified the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)0 ($11,000) ($11,000)1 4,000 1,0002 5,000 6,0003 6,000 5,0004 1,000 5,000

a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

b. If the required return is 11 percent, what is the NPV for each of these projects? Which project will you choose if you apply the NPV decision rule?

c. Over what range of discount rates would you choose Project A? Project B? At what discount rate would you be indifferent between these two projects? Explain.

SolutionInstructionsUse the IRR and NPV functions to solve this problem.

a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct?

Project A Project BInternal rate of return FORMULA FORMULA

Accept project ---->

b. If the required return is 11 percent, what is the NPV for each of these projects? Which project will you choose if you apply the NPV decision rule?

Required return 11%

Project A Project BNet present value FORMULA FORMULA

Accept project ---->

c. Over what range of discount rates would you choose Project A? Project B? At what discount rate would you be indifferent between these two projects? Explain.



Problem 9-15 ObjectiveCalculate the profitability index.


What is the profitability index for the following set of cash flows if the relevant discount rate is:10%15%22%

Year Cash Flow0 ($1,600)1 9002 3503 300

SolutionInstructionsUse the NPV Excel function to calculate the profitability index.

Cash Year Flow

0 ($1,600)1 9002 3503 300

Required returns 10% 15% 22%Profitability index FORMULA FORMULA FORMULA



Problem 9-18 ObjectiveUnderstanding NPV and discount rates.


An investment has an installed cost of $257,650. The cash flows over the four-year life of the investment are projected to be:

Year Cash Flow1 $75,429 2 153,408 3 102,389 4 50,000

If the discount rate is zero, what is the NPV?

If the discount rate is infinite, what is the NPV?

At what discount rate is the NPV just equal to zero?

Sketch the NPV profile for this investment based on these three points.

SolutionInstructionsUse the NPV function to solve the problem.

If the discount rate is zero, what is the NPV?

Year Cash Flow0 ($257,650)1 $75,429 2 153,408 3 102,389 4 50,000

Discount rate 0%NPV FORMULA

If the discount rate is infinite, what is the NPV?

NPV

At what discount rate is the NPV just equal to zero? (Hint: IRR)

Discount rate FORMULANPV #VALUE!



Problem 9-23 ObjectiveCalculate NPV of a perpetuity


The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up." As a result, the cemetery project will provide a net cash inflow of $25,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $300,000.

a. If Yourdone requires a 14 percent return on such undertakings, should the cemetery business be started?

b. The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows. At what constant growth rate would the company just break even if it still required a 14 percent return on investment?

SolutionInstructionsEnter data and formulas to solve the problem.

a. If Yourdone requires a 16 percent return on such undertakings, should the cemetery business be started?

Required returnInitial InvestmentFirst year cash flowGrowth rate

Present value of first year cash flow FORMULAPresent value of remaining cash flows (year 2) #DIV/0!Present value of cash flows year 2 and beyond FORMULAPresent value of investments #VALUE!Less initial investment $0.00 Net present value #VALUE!

b. The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows. At what constant growth rate would the company just break even if it still required a 16 percent return on investment?

$25,000/(.16 – g) = $300,000; g = 7.67%g =

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