Q1.

Olsen Engineering is considering including two pieces of equipmenta truck

and an overhead pulley systemin this years capital budget. The projects are
independent. The cash outlay for the truck is $22,430, and for the pulley system it
is $17,100. Each piece of equipment has an estimated life of five years. The annual
after-tax cash flow expected to be provided by the truck is $7,500, and for the
pulley it is $5,100. The firms required rate of return is 14 percent. Calculate the
NPV, IRR, MIRR, the traditional payback (PB) period, and the discounted payback
(DPB) period for each project. Indicate which project(s) should be accepted.
See the excel file for excel solution
Pulley System:
1

NPV $17,100 $5,100

1
(1.14 ) 5

$17,100 $5,100(3.43308)

0.14

$17,100 $17,508.71 $408.71

The Pulley System project is acceptable.

IRR 15%.

Cost

(Accept)

TV
(1 MIRR) n

MIRR Pulley

(1.14 ) 5 1

0.14

5,100
17,100

33,711 .53

17,100

1
5

(1 MIRR ) 5

33,711 .53

1.0 0.145 14.5%

Year

Expected CF

Cumulative PV of CF
0
$(17,100)
1
5,100
2
5,100
3
5,100
4
5,100
5
5,100

PV of CF
r = 14%
$(17,100)
4,474
3,924
3,442
3,020
2,649

DPBPulley = 4 + 2,240/2,649 = 4.85 years

PBPulley = $17,100/$5,100 = 3.35 years

$(17,100)
(12,626)
( 8,702)
( 5,260)
( 2,240)
409

Truck:
1

NPV $22,430 $7,500

1
(1.14 ) 5

$22, 430 $7,500(3.43308)

0.14

$22,430 $25,748.10 $3,318.10

The Truck Project is acceptable.

IRR = 20%. (Accept)

Cost

TV
(1 MIRR) n

MIRR Truck

(1.14 ) 5 1

0.14

7,500
22,430

49,576

22,430

1
5

(1 MIRR) 5

49,575.78

1.0 0.172 17.2%

Year

Expected CF

Cumulative PV of CF
0
$(22,430)
1
7,500
2
7,500
3
7,500
4
7,500
5
7,500

PV of CF
r = 14%
$(22,430)
6,579
5,771
5,062
4,441
3,895

DPBTruck = 4 + 577/3,895 = 4.15 years

PBTruck = $22,430/$7,500 = 2.99 3 years

$(22,430)
(15,851)
(10,080)
( 5,018)
( 577)
3,318

Q2. Your company is considering two mutually exclusive projectsC and R whose
costs and cash flows are shown in the following table:

The projects are equally risky, and their required rate of return is 12 percent. You
must make a recommendation concerning which project should be purchased. To
determine which is more appropriate, compute the NPV and IRR of each project.
NPVC $14,000

$8,000
$6,000
$2,000
$3,000

(1.12)1
(1.12) 2
(1.12) 3
(1.12) 4

$14,000 $8,000(0.89286) $6,000(0.79719)

$2,000(0.71178 ) $3,000(0.63552)
$14,000 $7,142.88 $4,783.14 $1,423.56 $1,906.56
$14,000 $15,256.14
$1,256.14

IRRC = 17.3%

NPVR

$22,840 $8,000

1
(1.12 ) 4

0.12

$22,840 $8,000(3.03735) $1,458.80

IRRR = 15.0%
NPVR > NPVC, so Project R should be accepted.

Q3. The Chaplinsky Publishing Company is considering two mutually exclusive

expansion plans. Plan A calls for the expenditure of $40 million on a large scale,
integrated plant that will provide an expected cash flow stream of $6.4 million per
year for 20 years. Plan B calls for the expenditure of $12 million to build a
somewhat less efficient, more labor-intensive plant that has an expected cash flow
stream of $2.72 million per year for 20 years. Chaplinskys required rate of return is
10 percent.
a. Calculate each projects NPV and IRR.
b. Construct the NPV profiles for Plan A and Plan B. Using the NPV profiles,
approximate the crossover rate.
See the excel file for solution.
Q4.The Cordell Coffee Company is evaluating the within-plant distribution system
for its new roasting, grinding, and packing plant. The two alternatives are (1) a
conveyor system with a high initial cost but low annual operating costs and (2)
several forklift trucks, which cost less but have considerably higher operating costs.
The decision to construct the plant has already been made, and the choice here will
have no effect on the overall revenues of the project. The required rate of return for
the plant is 9 percent, and the projects expected net costs are listed in the
following table:

a. What is the present value of costs of each alternative? Which method should be
chosen? (Hint: Be carefulthese cash flows are outflows.)
b. What is the IRR of each alternative?
See the excel file.
a.

The PV of costs for the conveyor system is $556,717, while the PV of costs for the forklift
system is $493,407. Thus, the forklift system is expected to be $493,407 ($556,717)
= $63,310 less costly than the conveyor system, and hence the forklifts should be used.
1

PV costs of conveyor 300,000 (66,000)

1
(1.09 ) 5

0.09

300,000 (66,000)(3.88965) 556,716.90

b. The IRRs of the two alternatives are undefined. To calculate an IRR, the cash flow stream must include
both cash inflows and outflows.

CHAPTER 11 Cost of Capital: Follow the problem on pg. 482 and 483.