Project Management / a Managerial Approach
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: $65,000.00 Hurdle 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 |
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: $65,000.00 Hurdle 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 |