Documente Academic
Documente Profesional
Documente Cultură
=
1 10(.08)
.08
=
1
.08
- 10 = S2.5 mllllon
Dlff: 2
Toplc: 6.2 Alternutlve Declslon Rules
Sklll: Anulytlcul
15) You ure conslderlng purchuslng u new uutomuted forkllft system for your flrm's wurehouse. The uutomuted forkllft
wlll cost S500,000 und generute cush flows of S125,000 per yeur. The forkllft wlll depreclute evenly over the flve
yeurs, ut whlch polnt lt must be repluced. The cost of cupltul ls 8% per yeur. Bused upon the EVA lnvestment
rule, should you lnvest ln the uutomuted forkllft?
Answer: The EVA ls culculuted us follows (ull vulues ln thousunds):
Yeur 0 1 2 3 4 5
Cupltul 500 400 300 200 100 0
Cush Flow 125 125 125 125 125
Cupltul Churge -40 -32 -24 -16 -8
Depreclutlon -100 -100 -100 -100 -100
EVA -15 -7 1 9 17
PV of EVA -13.89 -6.00 0.79 6.62 11.57
Sum of PV(EVA) -0.91
For exumple, EVA
1
= S125 - 8%(S500) - S100 = -15
Slnce the PV(EVA) = -91,000 < 0 you should not lnvest.
Dlff: 3
Toplc: 6.2 Alternutlve Declslon Rules
Sklll: Anulytlcul
6.3 Mutuully Excluslve Investment Opportunltles
16) Whlch of the followlng stutements ls fulse?
A) Problems cun urlse uslng the IRR method when the mutuully excluslve lnvestments huve dlfferent cush flow
putterns.
B) The IRR ls uffected by the scule of the lnvestment opportunlty.
C) Multlple lncrementul IRRs mlght exlst.
D) The lncrementul IRR rule ussumes thut the rlsklness of the two pro|ects ls the sume.
Answer: B
Explunutlon: A)
B)
C)
D)
Dlff: 2
Toplc: 6.3 Mutuully Excluslve Investment Opportunltles
Sklll: Conceptuul
17) Whlch of the followlng stutements ls fulse?
A) The lncrementul IRR lnvestment rule upplles the IRR rule to the dlfference between the cush flows of the
two mutuully excluslve ulternutlves.
B) When u munuger must choose umong mutuully excluslve lnvestments, the NPV rule provldes u
strulghtforwurd unswer.
C) The llkellhood of multlple IRRs ls greuter wlth the regulur IRR rule thun wlth the lncrementul IRR rule.
D) Problems cun urlse uslng the IRR method when the mutuully excluslve lnvestments huve dlfferences ln
scule.
Answer: C
Explunutlon: A)
B)
C)
D)
Dlff: 2
Toplc: 6.3 Mutuully Excluslve Investment Opportunltles
Sklll: Conceptuul
Use the tuble for the questlon(s) below.
Conslder the followlng two pro|ects:
Pro|ect
Yeur 0
Cush Flow
Yeur 1
Cush Flow
Yeur 2
Cush Flow
Yeur 3
Cush Flow
Yeur 4
Cush Flow
Dlscount
Rute
A -100 40 50 60 N/A .15
B -73 30 30 30 30 .15
18) Assume thut pro|ects A und B ure mutuully excluslve. The correct lnvestment declslon und the best rutlonul for
thut declslon ls to?
A) Invest ln pro|ect A slnce NPV
B
< NPV
A
B) Invest ln pro|ect B slnce IRR
B
> IRR
A
C) Invest ln pro|ect B slnce NPV
B
> NPV
A
D) Invest ln pro|ect A slnce NPV
A
> 0
Answer: C
Explunutlon: A)
B)
C)
NPV
A
= -100 + 40 / (1.15)
1
+ 50 / (1.15)
2
+ 60 / (1.15)
3
= 12.04
NPV
B
= -73+ 30 / (1.15)
1
+ 30 / (1.15)
2
+ 30 / (1.15)
3
+ 30 / (1.15)
4
= 12.64
IRR A
CF
0
= -100
CF
1
= 40
CF
2
= 50
CF
3
= 60
Compute IRR = 21.65%
IRR B
CF
0
= -73
CF
1
= 30
CF
2
= 30
CF
3
= 30
CF
4
= 30
Compute IRR = 23.34%
D)
Dlff: 3
Toplc: 6.3 Mutuully Excluslve Investment Opportunltles
Sklll: Anulytlcul
19) The lncrementul IRR of Pro|ect B over Pro|ect A ls closest to:
A) 12.6%
B) 23.3%
C) 1.7%
D) 17.3%
Answer: A
Explunutlon: A) Flrst we need to flnd the lncrementul cush flows by tuklng cushflows of A - cushflows of B.
IRR A - B
CF
0
= (-100 - -73) = -27
CF
1
= (40 - 30) = 10
CF
2
= (50 - 30) = 20
CF
3
= (60 - 30) = 30
CF
4
= (0 - 30) = -30
Compute IRR = 12.63%
B)
C)
D)
Dlff: 3
Toplc: 6.3 Mutuully Excluslve Investment Opportunltles
Sklll: Anulytlcul
Use the tuble for the questlon(s) below.
Conslder the followlng two pro|ects:
Pro|ect
Yeur 0
C/F
Yeur 1
C/F
Yeur 2
C/F
Yeur 3
C/F
Yeur 4
C/F
Yeur 5
C/F
Yeur 6
C/F
Yeur 7
C/F
Dlscount
Rute
Alphu -79 20 25 30 35 40 N/A N/A 15%
Betu -80 25 25 25 25 25 25 25 16%
20) Assume thut pro|ects Alphu und Betu ure mutuully excluslve. The correct lnvestment declslon und the best
rutlonul for thut declslon ls to?
A) Invest ln pro|ect Betu slnce NPV
Betu
> 0
B) Invest ln pro|ect Alphu slnce NPV
Betu
< NPV
Alphu
C) Invest ln pro|ect Betu slnce IRR
B
> IRR
A
D) Invest ln pro|ect Betu slnce NPV
Betu
> NPV
Alphu
> 0
Answer: D
Explunutlon: A)
B)
C)
D) NPV Alphu
NPV = -79 + 20 / (1.15)
1
+ 25 / (1.15)
2
+ 30 / (1.15)
3
+ 35 / (1.15)
4
+ 40 / (1.15)
5
= 16.92
NPV Betu
NPV = -80 + 25 / (1.16)
1
+ 25 / (1.16)
2
+ 25 / (1.16)
3
+ 25 / (1.16)
4
+ 25 / (1.16)
5
+
50 / (1.16)
6
+ 25 / (1.16)
7
= 20.96
IRR Alphu
CF
0
= -79
CF
1
= 20
CF
2
= 25
CF
3
= 30
CF
4
= 35
CF
5
= 40
Compute IRR = 22.68
IRR Betu
PV = -80
PMT = 25
FV = 0
N = 7
Compute I = 24.52
Dlff: 3
Toplc: 6.3 Mutuully Excluslve Investment Opportunltles
Sklll: Anulytlcul
Use the tuble for the questlon(s) below.
Conslder two mutuully excluslve pro|ects wlth the followlng cush flows:
Pro|ect
C/F
0
C/F
1
C/F
2
C/F
3
C/F
4
C/F
5
C/F
6
A S(41,215) S12,500 S14,000 S16,500 S18,000 20,000 N/A
B S(46,775) S15,000 S15,000 S15,000 S15,000 S15,000 S15,000
WS1
)
You ure conslderlng uslng the lncrementul IRR upprouch to declde between the two mutuully excluslve pro|ects A
& B. How muny potentlul lncrementul IRRs could there be?
A) 3
B) 0
C) 2
D) 1
Answer: A
Explunutlon: A)
Pro|ect
C/F
0
C/F
1
C/F
2
C/F
3
C/F
4
C/F
5
C/F
6
A (S41,215) S12,500 S14,000 S16,500 S18,000 20,000 0
B (S46,775) S15,000 S15,000 S15,000 S15,000 S15,000 S15,000
B - A (S5,560) S2,500 S1,000 (S1,500) (S3,000) (S5,000) S15,000
Note thut there ure three slgn chunges hence there potentlul IRRs.
B)
C)
D)
Dlff: 2
Toplc: 6.3 Mutuully Excluslve Investment Opportunltles
Sklll: Anulytlcul
WS2
)
Whut ls the lncrementul IRR for pro|ect B over pro|ect A? Would you feel comfortuble buslng your declslon on the
lncrementul IRR?
Answer:
Pro|ect
C/F
0
C/F
1
C/F
2
C/F
3
C/F
4
C/F
5
C/F
6
A (S41,215) S12,500 S14,000 S16,500 S18,000 20,000 0
B (S46,775) S15,000 S15,000 S15,000 S15,000 S15,000 S15,000
B - A (S5,560) S2,500 S1,000 (S1,500) (S3,000) (S5,000) S15,000
Compute IRR = 8.95%, no slnce there ure multlple slgn chunges ln the lncrementul cush flows.
Dlff: 2
Toplc: 6.3 Mutuully Excluslve Investment Opportunltles
Sklll: Anulytlcul
WS3
)
Assumlng thut the dlscount rute for pro|ect A ls 16% und the dlscount rute for B ls 15%, then glven thut these ure
mutuully excluslve pro|ects, whlch pro|ect would you tuke und why?
Answer: NPV A
CF
0
= -41,215
CF
1
= 12,500
CF
2
= 14,000
CF
3
= 16,500
CF
4
= 18,000
CF
5
= 20,000
I = 16
Compute NPV = S9,999.50
NPV B
CF
0
= -46,775
CF
1
= 15,000
CF
2
= 15,000
CF
3
= 15,000
CF
4
= 15,000
CF
5
= 15,000
CF
6
= 15,000
Compute NPV = S9,9992.24
Tuke A, slnce NPV of A > NPV of B und both ure posltlve.
Dlff: 3
Toplc: 6.3 Mutuully Excluslve Investment Opportunltles
Sklll: Anulytlcul
6.4 Pro|ect Selectlon wlth Resource Restrulnts
Use the tuble for the questlon(s) below.
Conslder the followlng llst of pro|ects:
Pro|ect Investment NPV
A 135,000 6,000
B 200,000 30,000
C 125,000 20,000
D 150,000 2,000
E 175,000 10,000
F 75,000 10,000
G 80,000 9,000
H 200,000 20,000
I 50,000 4,000
21) Assumlng thut your cupltul ls construlned, whut ls the flfth pro|ect thut you should lnvest ln?
A) Pro|ect H
B) Pro|ect I
C) Pro|ect B
D) Pro|ect A
Answer: A
Explunutlon: A)
Pro|ect
Investment
NPV
Profltublllty
Index
Runk
A 135,000 6,000 0.0444 8
B 200,000 30,000 0.1500 2
C 125,000 20,000 0.1600 1
D 150,000 2,000 0.0133 9
E 175,000 10,000 0.0571 7
F 75,000 10,000 0.1333 3
G 80,000 9,000 0.1125 4
H 200,000 20,000 0.1000 5
I 50,000 4,000 0.8000 6
B)
C)
D)
Dlff: 2
Toplc: 6.4 Pro|ect Selectlon wlth Resource Construlnts
Sklll: Anulytlcul
22)
Assumlng thut your cupltul ls construlned, so thut you only huve S600,000 uvulluble to lnvest ln pro|ects, whlch
pro|ect should you lnvest ln und ln whut order?
A) CBFH
B) CBGF
C) BCFG
D) CBFG
Answer: A
Explunutlon: A)
Pro|ect
Investment
NPV
Profltublllty
Index
Runk
A 135,000 6,000 0.0444 8
B 200,000 30,000 0.1500 2
C 125,000 20,000 0.1600 1
D 150,000 2,000 0.0133 9
E 175,000 10,000 0.0571 7
F 75,000 10,000 0.1333 3
G 80,000 9,000 0.1125 4
H 200,000 20,000 0.1000 5
I 50,000 4,000 0.8000 6
Thls ls u trlcky problem ln thut by the runklngs CBFG seem optlmul, but thls comblnutlon leuves
S120,000 on the tuble unlnvested. By repluclng G wlth H the full S600,000 ls lnvested und the
NPV of the comblnutlon of pro|ects ls lncreused by S11,000. Therefore you should lnvest ln
pro|ects CBFH.
B)
C)
D)
Dlff: 3
Toplc: 6.4 Pro|ect Selectlon wlth Resource Construlnts
Sklll: Anulytlcul
23) Assume thut your cupltul ls construlned, so thut you only huve S600,000 uvulluble to lnvest ln pro|ects. If you
lnvest ln the optlmul comblnutlon of pro|ects glven your cupltul construlnt, then the totul NPV for ull the pro|ects
you lnvest ln wlll be closest to:
A) S65,000
B) S80,000
C) S69,000
D) S111,000
Answer: B
Explunutlon: A)
B)
Pro|ect
Investment
NPV
Profltublllty
Index
Runk
A 135,000 6,000 0.0444 8
B 200,000 30,000 0.1500 2
C 125,000 20,000 0.1600 1
D 150,000 2,000 0.0133 9
E 175,000 10,000 0.0571 7
F 75,000 10,000 0.1333 3
G 80,000 9,000 0.1125 4
H 200,000 20,000 0.1000 5
I 50,000 4,000 0.8000 6
Thls ls u trlcky problem ln thut by the runklngs CBFG seem optlmul, but thls comblnutlon leuves
S120,000 on the tuble unlnvested. By repluclng G wlth H the full S600,000 ls lnvested und the
NPV of the comblnutlon of pro|ects ls lncreused by S11,000. Therefore you should lnvest ln
pro|ects CBFH.
The NPV = NPV
C
+ NPV
B
+ NPV
F
+ NPV
H
= 20000 + 30000 + 10000 + 20000 = S80,000.
C)
D)
Dlff: 3
Toplc: 6.4 Pro|ect Selectlon wlth Resource Construlnts
Sklll: Anulytlcul