Project Management / a Managerial Approach

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Chapter 2 Homework

Problem 1:

 | Project Cost| Net Cash Flows| Payback|
Project A| 250,000.00| 75,000.00| 3.33|
Project B| 150,000.00| 52,000.00| 2.88|

Project B is better. It is less risky because it has a payback period of 2.88 or 2 years and 10 months.

Problem 2:

Average Rate of Return: ?
Annual Profits: 30,000.00
Project Cost: 200,000.00

Average Rate of Return = $30,000/$200,000 = 0.15 = 15%

Problem 3:

Year| Nominal Cash Flow| Discounted Cash Flow|
0| -75,000.00| -75,000|
1| 20,000.00| 16,667|
2| 25,000.00| 17,361|
3| 30,000.00| 17,361|
4| 50,000.00| 24,113|
Net Present Value =| 502|

Net Present Value for this 4 year financial project is $502.00, because NPV is positive the project is deemed acceptable.

Problem 4:

Year| Nominal Cash Flow| Discounted Cash Flow|
0| -75,000.00| -75,000|
1| 20,000.00| 16,129|
2| 25,000.00| 16,259|
3| 30,000.00| 15,735|
4| 50,000.00| 21,149|
Net Present Value =| -5,729|

Net Present Value for this 4 year financial project with the addition of a 4% inflation rate is negative $5,729.00; because NPV is negative the project is not acceptable.

Problem 5:

Profitability index = NPV Future Cash Flows/Initial Cash Flow | Problem 3| Problem 4|
Discounted Cash Flows| 75,502| 69,271|
Initial Cash Investment| 75,000.00| 75,000.00|
Profitability index | 1.01| 0.92|

Problem 6:

Information given:

Year| Pessimistic| Most Likely| Optimistic|
1| 14,000.00| 2,000.00| 2,200.00|
2| 1,900.00| 25,000.00| 30,000.00|
3| 2,700.00| 30,000.00| 36,000.00|
4| 32,000.00| 35,000.00| 3,900.00|

Project cost: $65,000.00Hurdle Rate: 20%

Year| Nominal Cash Flow| Discounted Cash Flow|
0| -65,000| -65,000|
1| 20,000| 16,667|
2| 25,000| 17,361|
3| 30,000| 17,361|
4| 35,000| 16,879|
Net Present Value =| 3,268|

Discounted Cash Flows| 68,268|...
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