Example 5-13: Finance

Kendra Hand

5.11

Project 1 Project 2 Incremental Cash Flows

Year Deepwater Fishing New Submarine Ride

0 ($950,000) ($1,850,000) -$900,000.00

1 $370,000 $900,000 $530,000.00 Project 1

2 $510,000 $800,000 $290,000.00 NPV= $50,477.88

3 $420,000 $750,000 $330,000.00 IRR= 17%

Incremental IRR 15%

R= 14%

a) If your decision rule is to accept the project with the greater IRR, you should choose project 1, Deepwater Fishing.

b) Based on the incremental IRR, I would choose project 2, which is the New Submarine Ride because the incremental IRR is greater than the annual return.

c) Based on the NPV, I would choose project 2, New Submarine Ride, because it is higher when compared to project 1.

This response is consistent with the Incremental IRR rule.

5.22

Year Cash Flow

0 ($1,008) search between 20% and 70%

1 $5,724

2 ($12,140)

3 $11,400

4 ($4,000)

IRR= 25%

$1,008.00 33%

$1,008.00 43%

There are 3 IRRs between 20% and 70%. We should take this project at IRR 43%

13.17

Cost of Debt:

Number of Bonds 60,000

Face Value of Bond $100

Coupon Rate 6%

Market Price $109.50

Book Value $100*60,000= $6,000,000

Years to Maturity 20 years

Number of 0 Coupon 230,000

Face Value of Bond $100

Quoted Price $17.50

Book Value $100*230,000= $23,000,000

Total Book Value $29,000,000

Years to Maturity 30 years