What is the payback period for the following set of cash flows?

Year
0
1
2
3
4
 Cashflows cumulative CF
$ (5,500.00)
$ 1,300.00 $ 1,300.00
$ 1,500.00 $ 2,800.00
$ 1,900.00 $ 4,700.00
$ 1,400.00 $ 6,100.00

$ 800.00
6.86
3 yrs and 6.86 months
An investment project provides cash inflows of $585 per year for eight years.
What is the project payback period if the initial cost is $1,700? What if the
initial cost is $3,300? What if it is $4,900?
year
0
1
2
3
4
5
6
7
8

year
0
1
2
3
4
5
6
7
8

year
0
1
2
3
4
5
6
7
8
CF acc CF
-1700
585 585
585 1170
585 1755
585 2340
585 2925
585 3510
585 4095
585 4680

530
10.8717948717949
2yrs and 10.87 months

CF acc CF
-3300
585 585
585 1170
585 1755
585 2340
585 2925
585 3510
585 4095
585 4680

375
7.69230769230769
5yrs and 7.69 months

CF acc CF
-4900
585 585
585 1170
585 1755
585 2340
585 2925
585 3510
585 4095
585 4680
no payback
Buy Coastal, Inc., imposes a payback cutoff of three years for its
international investment projects. If the company has the following two
projects available, should it accept either of them?
disc rate=10% Year
0
1
2
3
4

payback period

Year
0
1
2
3
4

disc rate
discounted payback period
Year
0
1
2
3
4
NPV
sum of disc CFs-initial investment
 Cash flow (A) Cash flow (B)
$ (60,000.00) $ (70,000.00)
$ 23,000.00 $ 15,000.00
$ 28,000.00 $ 18,000.00
$ 21,000.00 $ 26,000.00
$ 8,000.00 $ 230,000.00

2yrs+9000/21000*12 months 3yrs+11000/230000*12

5.14285714285714 0.573913043478261

2yrs&5.14 months 3yrs and 0.57 months

Cash flow (A) Cash flow (B) accumulated CF(A)

$ (60,000.00) $ (70,000.00)
$ 23,000.00 $ 15,000.00 $ 23,000.00
$ 28,000.00 $ 18,000.00 $ 51,000.00
$ 21,000.00 $ 26,000.00 $ 72,000.00
$ 8,000.00 $ 230,000.00 $ 80,000.00
Total CF b/w 2nd and 3rd ye $ 21,000.00
required CF $ 9,000.00
months 5.14285714285714
2yrs&5.14 months

10%

Cash flow (A) Cash flow (B) discounted CF(A)

$ (60,000.00) $ (70,000.00)
$ 23,000.00 $ 15,000.00 $ 20,909.09
$ 28,000.00 $ 18,000.00 $ 23,140.50
$ 21,000.00 $ 26,000.00 $ 15,777.61
$ 8,000.00 $ 230,000.00 $ 5,464.11
$ 5,291.31 $ 135,139.68
$ 5,291.31 $ 135,139.68 both calculations give same results
accumulated CF(B)

$ 15,000.00
$ 33,000.00
$ 59,000.00
$ 289,000.00
$ 230,000.00
$ 11,000.00
0.573913043478261
3yrs and 0.57 months

discounted CF(B) accumulated CF(A) accumulated CF(B)

$ 13,636.36 $ 20,909.09 $ 13,636.36

$ 14,876.03 $ 44,049.59 $ 28,512.40
$ 19,534.18 $ 59,827.20 $ 48,046.58
$ 157,093.09 $ 65,291.31 $ 205,139.68

total Cf b/w year 3&4 $ 5,464.11 $ 157,093.09

required CF $ 172.80 $ 21,953.42
months 0.379500000000024 1.67697391304348

3yrs&0.3795 months 3yrs&1.676 months

ations give same results
An investment project has annual cash inflows of $3,200, $4,100,
$5,300, and $4,500, and a discount rate of 14 percent. What is the
discounted payback period for these cash flows if the initial cost is
$5,900? What if the initial cost is $8,000? What if it is $11,000?
disc rate 14%
initial cost 5900
year CF
1 3200
2 4100
3 5300
4 4500

initial cost 8000

year CF
1 3200
2 4100
3 5300
4 4500

initial cost 11000

year CF
1 3200
2 4100
3 5300
4 4500
discounted CF accumulated CF
2807.01754385965 2807.01754385965
3154.81686672822 5961.83441058787
3577.34903587069 9539.18344645856
2664.36124816585 12203.5446946244

cf between yr 1 and 2 3154.81686672822

requird CF 3092.98245614035
months 11.7648

discounted CF accumulated CF
2807.01754385965 2807.01754385965
3154.81686672822 5961.83441058787
3577.34903587069 9539.18344645856
2664.36124816585 12203.5446946244

cf between yr 2 and 3 3577.34903587068

required CF 2038.16558941213
months 6.83690264150944

discounted CF accumulated CF
2807.01754385965 2807.01754385965
3154.81686672822 5961.83441058787
3577.34903587069 9539.18344645856
2664.36124816585 12203.5446946244

cf between yr 3 and 4 2664.36124816585

required CF 1460.81655354144
months 6.57936256000001
An investment project costs $10,000 and has annual cash flows of $2,900 for
six years. What is the discounted payback period if the discount rate is zero
percent? What if the discount rate is 5 percent? If it is 19 percent?
year CF
0 -10000
1 2900
2 2900
3 2900
4 2900
5 2900
6 2900
disc rate 5% initial investment 10000
disc CF acc CF

2761.904762 2761.904762
2630.385488 5392.290249
2505.129036 7897.419285
2385.837177 10283.25646
2272.225883 12555.48234
2164.02465 14719.507 2102.580715
years months 2385.837177
3 0.881275862
You’re trying to determine whether to expand your business by building a
new manufacturing plant. The plant has an installation cost of $12 mil- lion,
which will be depreciated straight-line to zero over its four-year life. If the
plant has projected net income of $1,854,300, $1,907,600, $1,876,000, and
$1,329,500 over these four years, what is the project’s average accounting
return (AAR)? year
0
1
2
3
4
average

AAR
value income
12000000
9000000 1854300
6000000 1907600
3000000 1876000
0 1329500
6000000 1741850

29.03%
A firm evaluates all of its projects by applying the IRR rule. If the required
return is 14 percent, should the firm accept the following project?
Year Cash flow
0 $ (28,000.00)
1 $ 12,000.00
2 $ 15,000.00
3 $ 11,000.00

NPV@14% ₹ 1,493.02
hence accept

NPV profile at diff disc rates

4% $ 7,185.76
14% $ 1,493.02
20% $ -1,217.59
25% $ -3,168.00
30% $ -4,886.66

4% $ 7,185.76
17.183% $ 0.00
20% $ -1,217.59
25% $ -3,168.00
30% $ -4,886.66

IRR 17.183%
NPV $ -
in formula always take the CFs from year 1, i.e excluding the original investment

cutoff value- using goal seek- it is called internal rate of return (IRR)
For the cash flows in the previous problem, suppose the firm
uses the NPV decision rule. At a required return of 11 percent,
should the firm accept this project? What if the required return
is 25 percent?

at 11% accept
at 25% not accept
as IRR is 17%
as IRR is 17%
A project that provides annual cash flows of $17,300 for nine years costs
$79,000 today. Is this a good project if the required return is 8 percent?
What if it’s 20 percent? At what discount rate would you be indifferent
between accepting the project and rejecting it?
0 -79000
1 17300
2 17300
3 17300
4 17300
5 17300
6 17300
7 17300
8 17300
9 17300

IRR 16.25%
 8% 20%
NPV 29071.16 -9264.28
What is the IRR of the following set of cash flows?
Year Cashflow
0 $ (16,400.00)
1 $ 7,100.00
2 $ 8,400.00
3 $ 6,900.00

IRR 17.42%
For the cash flows in the previous problem, what is the NPV at a discount
rate of zero percent? What if the discount rate is 10 percent? If it is 20
percent? If it is 30 percent? disc rate

NPV
 30%

-2827.40
Garage, Inc., has identified the following two mutually exclusive projects: Year Cashflow (A)
0 $ (29,000.00)
1 $ 14,400.00
2 $ 12,300.00
3 $ 9,200.00
4 $ 5,100.00
What is the IRR for each of these projects? Using the IRR decision rule,
which project should the company accept? Is this decision necessarily
correct? IRR 18.555%
If the required return is 11 percent, what is the NPV for each of these
projects? Which project will the company choose if it applies the NPV
decision rule? NPV $ 4,042.42
Over what range of discount rates would the company choose project A?
Project B? At what discount rate would the company be indifferent between
these two projects? Explain. crossover rate 14.831%

NPV profiling
disc rate A
5% $ 8,013.84
10% $ 4,651.66
15% $ 1,787.40
20% $ -674.77
25% $ -2,808.64
30% $ -4,671.79
35% $ -6,309.65
40% $ -7,758.43
45% $ -9,047.32
Cashflow (B) A-B
$ (29,000.00) $ -
$ 4,300.00 $ 10,100.00
$ 9,800.00 $ 2,500.00
$ 15,200.00 $ -6,000.00
$ 16,800.00 $ -11,700.00

17.415% accept A IRR higher the better

$ 5,008.56 accept B

only one sign change, hence only one IRR for A-B

Chart Title
B
$15,000.00
$ 10,935.86
$ 5,902.88
$ 1,749.04 $10,000.00
$ -1,712.96
$ -4,624.32
$ -7,092.82 $5,000.00
$ -9,201.72
$ -11,016.03
$-
$ -12,587.04 0% 5% 10% 15% 20% 25% 30% 35%

$-5,000.00

$-10,000.00

$-15,000.00

A B
higher the better

whenever conflict b/w IRR and NPV results, go with the

decision given by NPV, hence accept B here

Chart Title

5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

A B
Consider the following two mutually exclusive projects: Year Cashflow (X)
0 $ (20,000.00)
1 $ 8,850.00
2 $ 9,100.00
3 $ 8,800.00

Sketch the NPV profiles for X and Y over a range of discount rates from
zero to 25 percent. What is the crossover rate for these two projects? Rate NPVX
0% $ 6,750.00
5% $ 4,284.31
10% $ 2,177.69
15% $ 362.70
20% $ -1,212.96
25% $ -2,590.40
Cashflow (Y) X-Y
$ (20,000.00) $ -
$ 10,100.00 $ -1,250.00 crossover rate 11.19%
$ 7,800.00 $ 1,300.00
$ 8,700.00 $ 100.00

NPVY
$ 6,600.00 Chart Title
$ 4,209.26
$8,000.00
$ 2,164.54
$ 400.92
$ -1,131.94 $6,000.00
$ -2,473.60

$4,000.00

$2,000.00

$-
0% 5% 10% 15% 20%

$-2,000.00

$-4,000.00

NPVX NPVY
20% 25% 30%
Light Sweet Petroleum, Inc., is trying to evaluate a generation project with
the following cash flows: Year Cashflow
0 $ (39,000,000.00)
1 $ 63,000,000.00
2 $ (12,000,000.00)
If the company requires a 12 percent return on its investments, should it
accept this project? Why? NPV $ 7,683,673.47

Compute the IRR for this project. How many IRRs are there? Using the IRR
decision rule, should the company accept the project? What’s going on here? IRR1 39.478%

NPV profile
disc rate NPV
-90% $ -609,000,000.00
-85% $ -152,333,333.33
-80% $ -24,000,000.00
-75% $ 21,000,000.00
-70% $ 37,666,666.67
-65% $ 43,040,816.33
-60% $ 43,500,000.00
-55% $ 41,740,740.74
-50% $ 39,000,000.00
-45% $ 35,876,033.06
-40% $ 32,666,666.67
-35% $ 29,520,710.06
-30% $ 26,510,204.08
-25% $ 23,666,666.67
-20% $ 21,000,000.00
-15% $ 18,508,650.52
-10% $ 16,185,185.19
-5% $ 14,019,390.58
0% $ 12,000,000.00
5% $ 10,115,646.26
10% $ 8,355,371.90
15% $ 6,708,884.69
20% $ 5,166,666.67
25% $ 3,720,000.00
30% $ 2,360,946.75
35% $ 1,082,304.53
40% $ -122,448.98
45% $ -1,259,215.22
50% $ -2,333,333.33
55% $ -3,349,635.80
60% $ -4,312,500.00
65% $ -5,225,895.32
70% $ -6,093,425.61
disc CF
$ (39,000,000.00)
$ 56,250,000.00
$ -9,566,326.53

$ 7,683,673.47 YES ACCEPT

multiple will be there IRR2 -77.94%

NPV
$100,000,000.00

$-
-100% -80% -60% -40% -20% 0% 20% 40% 60%

$-100,000,000.00

$-200,000,000.00

$-300,000,000.00

$-400,000,000.00

$-500,000,000.00

$-600,000,000.00

$-700,000,000.00
40% 60% 80%
What is the profitability index for the following set of cash flows
if the relevant discount rate is 10 percent? What if the discount
rate is 15 percent? If it is 22 percent? Year Cashflow
0 $ (18,000.00)
1 $ 10,300.00
2 $ 9,200.00
3 $ 5,700.00

22%
PI 0.987
The Angry Bird Corporation is trying to choose between the following two
mutually exclusive design projects: Year Cashflow (I)
0 $ (64,000.00)
1 $ 31,000.00
2 $ 31,000.00
3 $ 31,000.00
If the required return is 10 percent and the company applies the profitability
index decision rule, which project should the firm accept? PI= 1.20

If the company applies the NPV decision rule, which project should it take? NPV= $ 13,092.41
Explain why your answers in (a) and (b) are different.
Cashflow (II)
$ (18,000.00)
$ 9,700.00
$ 9,700.00
$ 9,700.00

1.34

$ 6,122.46
Consider the following two mutually exclusive projects: Year Cashflow (A)
0 $ (350,000.00)
1 $ 45,000.00
2 $ 65,000.00
3 $ 65,000.00
4 $ 440,000.00
Whichever project you choose, if any, you require a 15 percent return on
your investment

If you apply the payback criterion, which investment will you choose? Why?
If you apply the discounted payback criterion, which investment will you
choose? Why?

If you apply the NPV criterion, which investment will you choose? Why? NPV= $ 32,589.76
If you apply the IRR criterion, which investment will you choose? Why? IRR= 18.14%
If you apply the profitability index criterion, which investment will you
choose? Why? PI= 1.09
Based on your answers in (a) through (e), which project will you finally
choose? Why? A, as per NPV
Cashflow (B) acc A Acc B disc A disc B acc disc A
$ (50,000.00) $ (350,000.00) $ (50,000.00)
$ 24,000.00 $ 45,000.00 $ 24,000.00 $ 39,130.43 $ 20,869.57 $ 39,130.43
$ 22,000.00 $ 110,000.00 $ 46,000.00 $ 49,149.34 $ 16,635.16 $ 88,279.77
$ 19,500.00 $ 175,000.00 $ 65,500.00 $ 42,738.56 $ 12,821.57 $ 131,018.33
$ 14,600.00 $ 615,000.00 $ 80,100.00 $ 251,571.43 $ 8,347.60 $ 382,589.76

choose B

choose B
$ 8,673.89
24.08%

1.17
acc disc B

$ 20,869.57
$ 37,504.73
$ 50,326.29
$ 58,673.89
An investment has an installed cost of $527,800. The cash flows
over the four-year life of the investment are projected to be
$221,850, $238,450, $205,110, and $153,820. 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.
year
0
1
2
3
4

disc rate
0%
5%
10%
15%
20%
25%
30%
infinite

IRR
CF
-527800
NPV
221850
238450 350000.00

205110
153820 300000.00

NPV 250000.00
291430.00
203496.72 200000.00
130111.24
68225.74 150000.00
15543.36
-29691.01 100000.00
-68835.70
₹ -527,800.00 50000.00

21.64% 0.00
0% 5% 10% 15% 20%

-50000.00

-100000.00
 NPV

15% 20% 25% 30% 35%

Slow Ride Corp. is evaluating a project with the following cash flows: Year
0
1
2
3
4
5
The company uses a 10 percent interest rate on all of its projects. Calculate
the MIRR of the project using all three methods
IRR1

NPV profiling
disc rate
-65%
-60%
-55%
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%

IRR2

Year
0
 1
2
3
4
5

Year
0
1
2
3
4
5
 Cash flow discounting method
$ (29,000.00) $ -34,836.66
$ 11,200.00 $ 11,200.00
$ 13,900.00 $ 13,900.00
$ 15,800.00 $ 15,800.00
$ 12,900.00 $ 12,900.00
$ (9,400.00) 0

23.17% Modified IRR= 19.288%

NPV profiling
NPV
$ (445,106.15)
$ (81,312.50)
$ 43,097.82
$ 81,000.00 NPV
$ 86,481.08 $200,0
$ 80,078.19
$ 69,915.37 $100,0
$ 59,230.02
$ 49,255.14
$ 40,385.74 -80% -60% -40% -20%
$ 32,670.00
$ 26,021.12 $(100,0
$ 20,309.15
$ 15,400.00 $(200,0
$ 11,170.73
$ 7,514.41 $(300,0
$ 4,340.44
$ 1,573.05
$(400,0
$ (850.75)
$ (2,983.18)
$ (4,867.58) $(500,0
$ (6,539.95)
$ (8,030.32)

-57.40%

reinvestment method
Cash flow final CF
$ (29,000.00) $ (29,000.00)
$ 11,200.00 ₹ 16,397.92 0
$ 13,900.00 ₹ 18,500.90 0
$ 15,800.00 ₹ 19,118.00 0
$ 12,900.00 ₹ 14,190.00 0
$ (9,400.00) ₹ 68,206.82 $ 58,806.82

combination method
Cash flow
$ (29,000.00) $ (29,000.00) ₹ -5,836.66 $ -34,836.66
$ 11,200.00 ₹ 16,397.92 0
$ 13,900.00 ₹ 18,500.90 0
$ 15,800.00 ₹ 19,118.00 0
$ 12,900.00 ₹ 14,190.00 0
$ (9,400.00) ₹ 68,206.82 ₹ 68,206.82
 reinvestment method Combination method
$ (29,000.00) $ -34,836.66
0 0
0 0
0 0
0 0
$ 58,806.82 ₹ 68,206.82

15.188% 14.382%

NPV
$200,000.00

$100,000.00

$-
-40% -20% 0% 20% 40% 60%

$(100,000.00)

$(200,000.00)

$(300,000.00)

$(400,000.00)

$(500,000.00)
MIRR 15.188%

MIRR 14.38%
60%
Suppose the company in the previous problem uses an 11 percent discount
rate and an 8 percent reinvestment rate on all of its projects. Calculate the
MIRR of the project using all three methods using these interest rates.

Year
0
1
2
3
4
5

Year
0
1
2
3
4
5

Year
0
1
2
3
4
5
discounting method
Cash flow
$ (29,000.00) ₹ -5,578.44 $ -34,578.44
$ 11,200.00 $ 11,200.00
$ 13,900.00 $ 13,900.00
$ 15,800.00 $ 15,800.00
$ 12,900.00 $ 12,900.00
$ (9,400.00) 0
MIRR= 19.664%

reinvestment method
Cash flow
$ (29,000.00) $ (29,000.00)
$ 11,200.00 ₹ 15,237.48 0
$ 13,900.00 ₹ 17,510.00 0
$ 15,800.00 ₹ 18,429.12 0
$ 12,900.00 ₹ 13,932.00 0
$ (9,400.00) ₹ 65,108.59 ₹ 55,708.59
MIRR= 13.95%

combination method
Cash flow
$ (29,000.00) $ (5,578.44) $ -34,578.44
$ 11,200.00 0
$ 13,900.00 0
$ 15,800.00 0
$ 12,900.00 0
$ (9,400.00) ₹ 65,108.59
MIRR= 13.49%
An investment under consideration has a payback of seven years and a cost
of $875,000. If the required return is 11 percent, what is the worst-case
NPV? The best-case NPV? Explain. Assume the cash flows are conventional.
year
0
1
2
3
4
5
6
7

NPV
CF acc CF
-875000
125000 125000
125000 250000
125000 375000
125000 500000
125000 625000
125000 750000
125000 875000

₹ -285,975.47
Anderson International Limited is evaluating a project in Erewhon. The
project will create the following cash flows:
Year Cashflow
0 $ (1,250,000.00)
1 $ 425,000.00
2 $ 490,000.00
3 $ 385,000.00
4 $ 340,000.00

All cash flows will occur in Erewhon and are expressed in dollars.
In an attempt to improve its economy, the Erewhonian
government has declared that all cash flows created by a foreign
company are “blocked” and must be reinvested with the govern-
ment for one year. The reinvestment rate for these funds is 4
percent. If Anderson uses an 11 percent required return on this
project, what are the NPV and IRR of the project? Is the IRR you
calculated the MIRR of the project? Why or why not?

Year Cashflow
0 $ (1,250,000.00)
1 $ 425,000.00
2 $ 490,000.00
3 $ 385,000.00
4 $ 340,000.00
5

NPV=
IRR=
CF
$ (1,250,000.00)
$ -
$ 442,000.00
$ 509,600.00
$ 400,400.00
$ 353,600.00

$ -45,047.48
9.76%