Answers for Chapter 7 Assignment

7.4 Amount of each payment = 50,000(A/P,10%,5)

= 50,000(0.26380)
= $13,190
Unrecovered balance after 3rd payment = 50,000(F/P,10%,3) 13,190(F/A,10%,3)
= 50,000(1.3310) 13,190(3.3100)
= $22,891
7.6 Profit = (24,112,054 - 8,432,372)(0.5) = $7,839,841
0 = -9,000,000 + 7,839,841(P/A,i,3)
(P/A,i,3) = 1.1480
Find i from equation, table, or spreadsheet
i = 69.1% (spreadsheet using RATE function)
7.7 0 = -3.1 + (2)(0.2)(P/A,i,10)
(P/A,i,10) = 7.7500
Find which interest table has 7.7500 in P/A column at n = 10
i is between 4% and 5%
i = 4.9% (spreadsheet, equation, or table interpolation)
7.18 Hand: In $1 million units,
0 = -500 + 1.8(0.1)(2500)(P/F,i,2) + 500(1.8)(0.9)(P/A,i,5)(P/F,i,5) 10(P/A,i,10)
0 = -500 + 450(P/F,i,2) + 810(P/A,i,5)(P/F,i,5) - 10(P/A,i,10)
Solve for i by trial and error
i = 42% per year

7.22 NCF swings indicating multiple ROR roots can occur for:
Large phase-out costs after a positive NCF series, e.g., environmental cleanup

 Large upgrade or reinvestment in mid-life surrounded by positive NCF series

Unexpected mid-life expenditure, e.g., one-time repair cost on oil well equipment
7.26 According to Norstroms criterion, there is only one positive root in a rate of return
equation when the cumulative cash flows (1) start out negatively, and (2) there is only one
sign change in them.

7.39 Hand: Follow the steps of the modified ROR procedure.

PW0 = -9000 - 2000(P/F,8%,2) - 7000(P/F,8%,3)
= -9000 - 2000(0.8573) - 7000(0.7938)
= $-16,271
FW6 = 4100(F/P,15%,5) + 12,000(F/P,15%,2) + 700(F/P,15%,1) + 800
= 4100(2.0114) + 12,000(1.3225) + 700(1.1500) + 800
= $25,722
25,722 = 16,271(F/P,i,6)
(F/P,i,6) = 1.5808
Use interpolation in factor tables or spreadsheet to find i.
i = 7.9% per year (spreadsheet)
Spreadsheet function: Enter NCF values (B2:B8) and = MIRR(B2:B8,8%15%) to display 7.9% per year.

7.44 Apply ROIC procedure , because investment rate ii = l5% is not equal to i* = 44.1% per
year. In $100 units,
F0 = -5000 F0 < 0; use i
F1 = -5000(1 + i) + 4000
= -5000 5000 i + 4000
= -1000 5000 i F1 < 0; use i
F2 = (-1000 5000 i)(1 + i)
= -1000 5000 i 1000 i 5000 i2
= -1000 6000 i 5000 i2 F2 < 0; use i
F3 = (-1000 6000 i 5000 i2)(1 + i)
= -1000 6000 i 5000 i2 1000 i 6000 i2 5000 i3
= -1000 7000 i 11,000 i2 5000i3 F3 < 0; use i
F4 = (-1000 7000 i 11,000 i2 5000i3)(1 + i) + 20,000
= 19,000 8000 i 18,000 i2 16,000i3 - 5000 i4 F4 > 0; use ii
F5 = (19,000 8000 i 18,000 i2 16,000 i3 - 5000 i4)(1.15) 15,000
= 6850 9200 i 20,700 i2 18,400 i3 - 5750 i4
Set F5 = 0 and solve for i by trial and error or spreadsheet for the ROIC approach.
i = 35.7% per year
A spreadsheet in the format of Figure 7-12 will also indicate an EROR of 35.7% per year.
7.49 I = 20,000(0.08)/2
= $800 per six months

Find P of all future payments for 16 years

P = 800(P/A,6%,32) + 20,000(P/F,6%,32)
= 800(14.0840) + 20,000(0.1550)
= $14,367
7.54 I = 25,000,000(0.05)/2
= $625,000 per six months
0 = 23,500,000 625,000(P/A,i,60) 25,000,000(P/F,i,60)
i = 2.7% per six months (spreadsheet)