BUSINESS FINANCE教学资料 Additional Problems_Answer key.pdfVIP

Chapter 9: NPV and other investment criteria Additional problems 1. The profitability index (PI) of a project is 1.0. What do you know about the projects net present value (NPV) and its internal rate of return (IRR)? If the PI is equal to 1.0, then the NPV = 0 and the IRR = Required return. 2. Explain how the internal rate of return (IRR) decision rule is applied to projects with financing type cash flows. For financing type projects, the decision rule is reversed from that for investing projects. Financing projects are accepted when the projects IRR is less than the required rate of return and rejected when the projects IRR is greater than the required return. Reject when RIRR as Accept when RIRR as the NPV is negative here the NPV is positive here 3. Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$10,110 -$10,110 1 5,373 4,443 2 3,373 3.543 3 4,473 5,343 What is the crossover rate for these two projects? A B B-A 0 -$10,110 -$10,110 0 1 5,373 4,443 -$930 2 3,373 3.543 170 3 4,473 5,343 870 Using R = 10% for B-A: NPV = -$51.31 Using R = 6% for B-A: NPV = $4.41 Interpolation: X/51.31 = (4-X)/4.41; X = 3.325 So, IRR of B-A = 10 – 3.325 = 6.675% The cross-over rate is 6.675%. You’d be indifferent about choosing either project if the discount rate is 6.675% 4. Consider the following two mutually exclusive projects: T