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MGT 326 HW 4 Solution

MGT 326 HW 4 Solution. 1. What is the Discounted Payback Period of a project with the cash flows depicted below? The firm’s WACC is 5.8%. $170k. $145k. $130k. $94k. $89k. 0. 1. 2. 3. 4. 5. 6. $50k. $370k. 112.25 / 128.24.

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MGT 326 HW 4 Solution

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  1. MGT 326 HW 4 Solution 1. What is the Discounted Payback Period of a project with the cash flows depicted below? The firm’s WACC is 5.8% $170k $145k $130k $94k $89k 0 1 2 3 4 5 6 $50k $370k 112.25 / 128.24 2. What is the NPV of the above project? The firm’s WACC is 5.8% CF, 2nd, CLR WORK (Clears Cash Flow Registers) -370, ENTER ↓, -50, ENTER ↓, ↓, 89, ENTER ↓, ↓, 130, ENTER ↓, ↓, 145, ENTER ↓, ↓, 170, ENTER ↓, ↓, 94, ENTER NPV, 5.8, ENTER ↓, CPT; NPV = $83.01 1

  2. MGT 326 HW 4 Solution 0 0 1 1 2 2 3 3 4 4 5 5 6 6 3. A firm is considering two mutually exclusive projects that have the annual cash flows shown below. Based on NPV analysis, which project should be accepted? The required rate of return is 7.0000% NPVA = $25.80 Accept Project A; highest NPV NPVB = $24.36 Proj A $18 $18 $18 $18 $18 $18 $60 NPV = [N=6, I/Y=7, PMT=18; CPT, PV] - $60 = $85.80 - $60 = $25.80 Proj B (Must use the common life approach) $30 $30 $30 $30 $30 $30 $45 $45 $45 CF, 2nd, CLR WORK (Clears Cash Flow Registers) -45, ENTER ↓, 30, ENTER ↓, ↓, -15, ENTER ↓, ↓, 30, ENTER ↓, ↓, -15, ENTER ↓, ↓, 30, ENTER ↓, ↓, 30, ENTER NPV, 7, ENTER ↓, CPT; NPV = $24.36

  3. MGT 326 HW 4 Solution 4 A firm is considering two mutually exclusive projects that have the annual cash flows shown below. Project A is a moderately risky project while Project B is considered to have a high degree of risk. The firm’s WACC is 7.34%. The firm uses the risk-adjusted discount rate method to account for project risk. Projects posing minimal risk are evaluated using WACC for the discount rate. Using the WACC as a base, 1.25% is added for moderately risky projects and 2.50% is added for significantly risky projects. The NPV of Project A is: -$13.86 The NPV of Project B is: -$32.18 Which project should be adopted? Project A: (Moderate Risk) CF, 2nd, CLR WORK (Clears Cash Flow Registers) -215, ENTER, ↓, 65, ENTER ↓, ↓, 63, ENTER ↓, ↓, 60, ENTER ↓, ↓, 57, ENTER NPV, 8.59, ENTER (radjusted = 7.34% + 1.25% = 8.5900%) ↓, CPT: NPV = -$13.86 Project B: (High Risk) CF, 2nd, CLR WORK (Clears Cash Flow Registers) -295, ENTER, ↓, 57, ENTER ↓, ↓, 75, ENTER ↓, ↓, 97, ENTER ↓, ↓, 110, ENTER NPV, , ENTER (radjusted = 7.34% + 2.5% = 9.84%) ↓, CPT: NPV = -$32.18 Adopt neither project

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