Colton Lane Charlson

September 29, 2014

Managerial Finance
Assignment 5
Problem 7-20
Year
0
1
2
3
4
5

Cash Flow
-10,000,000
5,000,000
2,000,000
2,000,000
2,000,000
2,000,000

Cumulative Cash Flow

-10,000,000
-5,000,000
-3,000,000
-1,000,000
1,000,000
3,000,000

Payback Period = 3.5 Years

Since the payback period is 3.5 years and the required payback period is 2 years we will not
make the movie.
Year
0
1
2
3
4
5

Cash Flow
-10,000,000
5,000,000
2,000,000
2,000,000
2,000,000
2,000,000
TOTAL

PV Factor @ 10%
1
(1 / 1.1) = .90909
(.90909 / 1.1) = .82645
(.82645 / 1.1) = .75131
(.75131 / 1.1) = .68301
(.68301 / 1.1) = .62092

Present Value
-10,000,000
4,545,455
1,652,893
1,502,630
1,366,027
1,241,843
$308,848

Yes the movie has a positive NPV of $308,848.

Problem 7-21
a) IRR
Project A NPV: (2/r) 10 = 0
Project A IRR = 20%
Project B NPV: (1.5 / (r-.02)) 10 = 0
.15 = r - .02
Project B IRR = 17%
Project A has the higher IRR
b) NPV when cost of capital is 7%
Project A NPV = (2 / .07) 10 = $18.57 Million
Project B NPV = (1.5 / (.07 - .02)) -10 = $20 Million
Project B has the higher NPV when the cost of capital is 7%

Colton Lane Charlson

September 29, 2014
Managerial Finance
Assignment 5
c) In order to know value that gives the correct answer to which investment has the best
opportunity you must set the two projects equal to one another.
Project A NPV = Project B NPV
(2/r) 10 = (1.5 / (.07 - .02)) -10
2 (r - .02) = 1.5r
.5r = .04
r = 8%
The IRR rule gives the correct answer for any discount rate greater than 8%.
Problem 8-1
a) Sales of new pizza lost sales of original = 20 0.40(20) = $12 million
b) Sales of new pizza lost sales of original pizza from customers who would not have
switched brands
= 20 0.50 (0.40) (20) = $16 million