Financial Management: Principles and Applications 5E - Solutions Manual 88 Chapter 9 Capital investment techniques 9.1 (a) Average Investment 50 0000 + 10 000 2 = 30 000 Accounting rate of return (average investment) 9 000 X 100 30 000 1 = 30.0% (b) Accounting rate of return (total investment) 9 000 X 100 50 000 1 = 18.0% 9.2 Proposal 1: Average Investment 100 000 2 = 50 000 Accounting rate of return 7 000 X 100 50 000 1 = 14.0% Proposal 2: Average Investment 150 000 + 20 000 2 = 85 000 Average Profits (after tax) -2 000 + 5 000 + 20 000 + 25 500 + 15 250 5 = 12 750 Accounting rate of return 12 750 X 100 85 000 1 = 15.0% Decision - choose Project 2. 9.3 Theory – refer to the text. 9.4 (a) Payback period 75 000 18 750 = 4.0 yrs (b) Yes
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Chapter 9
Capital investment techniques 9.1 (a) Average Investment 50 0000 + 10 000 2 = 30 000 Accounting rate of return (average investment) 9 000 X 100 30 000 1 = 30.0% (b) Accounting rate of return (total investment) 9 000 X 100 50 000 1 = 18.0% 9.2 Proposal 1: Average Investment 100 000 2 = 50 000 Accounting rate of return 7 000 X 100 50 000 1 = 14.0% Proposal 2: Average Investment 150 000 + 20 000 2 = 85 000 Average Profits (after tax) -2 000 + 5 000 + 20 000 + 25 500 + 15 250 5 = 12 750
Accounting rate of return 12 750 X 100 85 000 1 = 15.0%
Decision - choose Project 2. 9.3 Theory – refer to the text. 9.4 (a) Payback period 75 000 18 750 = 4.0 yrs (b) Yes
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9.5 (a) Net Profit after Tax 16 000 add Depreciation 5 000 21 000 78 750 Payback Period 21 000 = 3.75 years 78 750 + 11 250 (b) Average Investment 2 = 45 000 16 000 100 Accounting Rate of Return 45 000 X 1 = 35.6% 9.6 (a) Average profi t after tax 3 600
Average investment 30 000 + 0 2 = 15 000
3 600 100 Accounting rate of return 15 000 X 1 = 24% Decision: purchase plant as the return > 20.0% (b) Average profit after tax 3 600 add Depreciation per annum 3 750 Average after tax cash flows 7 350 30 000 Payback period 7 350 = 4.1 years Decision - do not purchase as payback period > 4.0 yrs. 9.7 Accounting Rate of Return 70 000 Average Net Profit after tax 5 = 14 000 14 000 100 Accounting Rate of Return 60 000 X 1 = 23.3% Decision - as the accounting rate of return > 20% you would accept the project Payback Period Years 1 2 3 4 5 Net Profit after tax 5 000 10 000 15 000 20 000 20 000 add Depreciation 8 000 8 000 8 000 8 000 8 000 After Tax cash flows 13 000 18 000 23 000 28 000 28 000 Cumulative cash flows13 000 31 000 54 000 82 000 110 000
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6 000 Payback Per iod 3 years + 28 000 = 3.2 years
Decis ion - as the payback per iod > 3 years you would reject the project. 9.8 Proposal 1 Annual Net Prof it after Tax 7 000 add Depreciat ion 20 000 After Tax Cash Flows 27 000 100 000 Payback Period 27 000 = 3.7 years Proposal 2 Years 1 2 3 4 5 Net Profi t after tax (2 000) 5 000 20 000 25 500 15 250 add Depreciation 26 000 26 000 26 000 26 000 26 000 After Tax cash Flows 24 000 31 000 46 000 51 500 41 250 Cumulative cash flows 24 000 55 000 101 000 152 500 193 750 49 000 Payback Per iod 3 years + 51 500 = 3.95 years 9.9 (a) Sales 390 000 Expenses 232 500 Depreciation 37 500 270 000 120 000 Tax (30%) 36 000 Net Profit after tax 84 000 (b) Average investment 300 000 2 = 150 000 84 000 100 Accounting rate of return 300 000 X 1 = 28% (c) Profit after tax 84 000 add Depreciation 37 500 After tax cash flows 121 500 300 000 (d) Payback period 121 500 = 2.5 years 9.10 Theory – refer text.
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9.11 Year Cash Flow PVIF(14%) P/Value
0 - 30 000 1.0000 - 30 000 1 5 500 .8772 4 825 2 6 000 .7695 4 617 3 11 000 .6750 7 425 4 11 000 .5921 6 513 5 13 000 .5194 6 752 Net Present Value + 132 Decision - buy machine as NPV > 0 Using a Sharp EL – 738/735S calculator
Clear the calculator: CFi , 2nd F , CA , ON/C 30 000 +/- ENT , 5 500 ENT , 6 000 ENT , 11 000 ENT , ENT , 13 000 ENT , 14 I/Y , 2ndF , CASH, ▼ , COMP the answer is: +131
9.12 (a) NPV At 18% Project P Cost (- 85 000 X 1.0000) - 85 000 Cash Flows (30 000 X PVIFA,5,18%) 93 816 Net Present Value +8 816 Project Q Cost (- 118 000 X 1.0000) - 118 000 Cash Flows (40 000 X 3.1272) 125 088 Net Present value + 7 088 Decision - choose Project P
(b) At 12% Project P Cost (- 85 000 X 1.0000) - 85 000 Cash Flows (30 000 X PVIFA,5,12%) 108 144 Net Present Value +23 144 Project Q Cost (-118 000 X 1.0000) -118 000 Cash Flows (40 000 X 3.6048) 144 192 Net Present Value +26 192 Decision - choose Project Q
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Using a Sharp EL-735/735S calculator Clear calculator: CFi , 2nd F , CA , ON/C
Project P
85 000 +/- ENT , 30 000 (x,y) , 5 ENT, 18 I/Y , 2ndF , CASH, ▼ , COMP the answer is: +8 815 then enter: ▲, 12 ENT, ▼ , COMP the answer is: + 23 143 Clear calculator: CFi , 2nd F , CA , ON/C
Project Q
118 000 +/- ENT , 40 000 (x,y) , 5 ENT, 18 I/Y , 2ndF , CASH, ▼ , COMP the answer is +7 087 then enter: ▲, 12 ENT, ▼ , COMP the answer is + 26 191
9.13 (a) 16 900 X PVIFA,6,i% = 64 000 64 000 therefore: PVIFA,6,i% = 16 900 = 3.7870 = 3.7870 This corresponds to an interest rate of approximately 15% (b) Using the same method as (a) the answer is 20%
(c) Using the same method as (a) the answer is 24 % Using a Sharp EL-738/735S calculator Clear calculator: CFi , 2nd F , CA , ON/C
(a) 64 000 +/- ENT , 16 900 (x,y) , 6 ENT, 2ndF , CASH, COMP the answer is: 14.98% (b) using the same method as (a) the answer is 20% (c) using the same method as (a) the answer is 24%
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9.14 (a)
Years
PVIF 12%
Cash Flows Net Present Value Machine 1 Machine 2 Machine 1 Machine 2
Machine 1 Clear the calculator: CFi , 2nd F , CA , ON/C 115 200 +/- ENT , 25 000 ENT , 30 000 ENT , ENT , 35 000 ENT , 30 000 ENT , ENT ,12 I/Y , 2ndF, CASH, ▼ , COMP ; the answer is: +6 856 then enter: ▲, COMP ; the answer is 14.01% Machine 2 Clear the calculator: CFi , 2nd F , CA , ON/C 72 000 +/- ENT , 15 000 ENT , 20 000 ENT , ENT , 25 000 ENT , 20 000 ENT , 15 000 ENT , 12 I/Y , 2ndF, CASH, ▼ , COMP ; the answer is: +6 408 then enter: ▲, COMP ; the answer is 15.02%
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9.15
(a) Profit before depreciation and tax 53 720 less Depreciation 25 000 Net Profit before tax 28 720 Tax (30%) 8 616 Net Profit after tax 20 104 150 000 + 0 Average Investment 2 = 75 000 20 104 100 Accounting rate of Return 75 000 X 1 = 26.8%
(b) Net Profit after tax 20 104 add Depreciation 25 000 After tax cash flows 45 104 150 000
(c) Payback Period 45 104 = 3.3 years
(d) Present Value 45 104 X PVIFA,6,12% = 185 441
(e) IRR 45 104 X PVIFA,6, i% = 150 000 150 000 PVIFA, 6 , i% 45 104 = 3.3256 Therefore the internal rate of return will be 20% Using a Sharp EL-738/735S calculator
Clear calculator: CFi , 2nd F , CA , ON/C
150 000 +/- ENT, 45 104 (x,y) , 6 ENT, 2ndF , CASH, COMP the answer is: 20%
9.16 (a) A B Average cash flows 4 000 8 000 less Depreciation 2 808 5 162 Profit after Tax 1 192 2 838
Accounting rate of return 1 192 100 Project A 8 424 X 1 = 14.2% 2 838 100 Project B 15 486 X 1 = 18.3%
Decision - choose Project A
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(b) Payback period 8 424 Project A 4 000 = 2.11 years 7 486 Project B 2 years +16 000 = 2.47 years Decision - choose Project A (c) Net Present Value Project A NPV 4 000 X PVIFA,3,12% - 8 424 +1 183 Project B Years Cash Flows PVIF NPV 0 - 15 486 1.0000 - 15 486 1 nil 0.8920 nil 2 8 000 0.7972 6 378 3 16 000 0.7118 11 389 +2 281 Decision - choose Project B (d) Internal rate of return Project A 4 000 X PVIFA,3,i% = 8 424 8 424 PVIFA, 3,i% = 4 000 = 2.106 Internal Rate of Return i = 20% Project B (at 18%) Years Cash Flows PVIF NPV 0 - 15 486 1.0000 - 15 486 1 nil 0.8475 nil 2 8 000 0.7182 5 746 3 16 000 0.6086 9 738 -2 Therefore the IRR for Project B is 18% Decision - choose Project A
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Using a Sharp EL – 738/735S calculator Project A Clear the calculator: CFi , 2nd F , CA , ON/C
8 424 +/- ENT, 4 000 (x,y) ,3 ENT, 12 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is: + 1 183 then enter: ▲, COMP ; the answer is 20% Project B Clear the calculator: CFi , 2nd F , CA , ON/C 15 486 +/- ENT, 0 ENT, 8 000 ENT , 16 000 ENT , 12 I/Y , 2ndF, CASH, ▼ , COMP ; the answer is: +2 280 then enter: ▲, COMP ; the answer is 18%
9.17 (a) Accounting rate of return 1 054 100 Machine A 5 000 X 1 = 21.08% 1 916 100 Machine B 8 000 X 1 = 23.95% Decision - choose B (b) Payback period Machine A B Net profit after tax 1 054 1 916 add Depreciation 2 000 3 200 Annual cash flows 3 054 5 116 Payback period 10 000 Machine A 3 054 = 3.27 years 16 000 Machine B 5 116 = 3.13 years Decision - choose B (c) Net present value Machine A -10 000 + 3 054 X PVIFA,5,10% = +1 577 Machine B -16 000 + 5 116 X PVIFA, 5,10% = +3 394
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Decision - choose B (d) Internal rate of return Machine A 10 000 PVIFA,5,i% = 3 054 = 3.2744 i = 16% Machine B 16 000 PVIFA,5,i% = 5 116 = 3.1274 i = 18% Decision - choose B Using a Sharp EL – 738/735S calculator
Machine A Clear the calculator: CFi , 2nd F , CA , ON/C 10 000 +/- ENT, 3 054 (x,y) ,5 ENT, 10 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is: + 1 577 then enter: ▲, COMP ; the answer is 16% Machine B Clear the calculator: CFi , 2nd F , CA , ON/C 16 000 +/- ENT, 5 116 (x,y) ,5 ENT, 10 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is: + 3 394 then enter: ▲, COMP ; the answer is 18%
9.18 (a) Payback period 12 000 X 2 years + 20 000 = 2.60 years 20 700 Y 2 years + 30 000 = 2.69 years 3 600 Z 3 years + 49 000 = 3.07 years Decision - choose X
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(b) Net present value Project X Years Cash flow Factor NPV 0 - 82 000 1.0000 - 82 000 1 40 000 .9091 36 364 2 30 000 .8264 24 792 3 20 000 .7513 15 026 4 20 000 .6830 13 660 Total NPV + 7 842 Project Y NPV = - 80 700 + 30 000 X PVIFA,4,10% = +14 397 Project Z Years Cash flow Factor NPV 0 -83 600 1.0000 -83 600 1 10 000 .9091 9 091 2 30 000 .8264 24 792 3 40 000 .7513 30 052 4 49 000 .6830 33 467 Total NPV +13 802 Decision - choose Y (c) Internal rate of return Project X = 15 % Project Y 80 700 PVIFA, 4,i% = 30 000 = 2.6900 i = 18% Project Z = 16% Decision - choose Y
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Using a Sharp EL – 738/735S calculator
Project X Clear the calculator: CFi , 2nd F , CA , ON/C 82 000 +/- ENT, 40 000 ENT, 30 000 ENT, 20 000 ENT, ENT, 10 I/Y, 2ndF, CASH, ▼ , COMP ; the answer is: +7 844 then enter: ▲, COMP ; the answer is 15% Project Y Clear the calculator: CFi , 2nd F , CA , ON/C 80 700 +/- ENT, 30 000 (x,y) , 4 ENT, 10 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is: + 14 396 then enter: ▲, COMP ; the answer is 18% Project Z Clear the calculator: CFi , 2nd F , CA , ON/C 83 600 +/- ENT, 10 000 ENT, 30 000 ENT, 40 000 ENT, 49 000 ENT, 10 I/Y , 2ndF, CASH, ▼ , COMP ; the answer is: +13 805 then enter: ▲, COMP ; the answer is 16%
9.19 Theory – refer text. 9.20
(a) Net present value (8%)
Machine A -37 920 + PVIFA,5,8% X 14 400 = +19 575 Machine B -58 440 + PVIFA,5,8% X 20 400 = +23 011 (b) Internal rate of return Machine A 37 920 PVIFA, 5,i% = 14 400 = 2.6333 i = 26% Machine B 58 440 PVIFA,5,I% = 20 400 = 2.8647 i = 22% (c) Recommend - Machine B – based upon NPV.
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(d) Net present value (15%)
Machine A -37 920 + PVIFA,5,15% X 14 400 = +10352 Machine B -58 440 + PVIFA,5,15% X 20 400 = +9 945
(e) Recommend - Machine A
Using a Sharp EL – 738/735S calculator Machine A Clear the calculator: CFi , 2nd F , CA , ON/C 37920 +/- ENT, 14 400 (x,y) , 5 ENT, 8 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is: + 19 575 then enter: ▲, COMP ; the answer is 26% then enter: 15 ENT, ▼ , COMP ; the answer is +10 351 Machine B Clear the calculator: CFi , 2nd F , CA , ON/C 58 440 +/- ENT, 20 400 (x,y) , 5 ENT, 8 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is: + 23 011 then enter: ▲, COMP ; the answer is 22% then enter: 15 ENT, ▼ , COMP ; the answer is +9 944
9.21 Theory – refer text. 9.22 (a) Net present value (10%) Project A Year Cash Flow PVIF,10% NPV 0 -10 000 1.0000 -10 000 1 8 000 .9091 7 273 2 2 000 .8264 1 653 3 2 000 .7513 1 503 4 1 000 .6830 683 5 115 .6209 71 Total NPV +1 183 Project B -25 000 + 15 000 X PVIFA,3,10% X PVIF,2,10% = +5 828 Project C -15 000 + 5 000 X PVIFA,5,10% = +3 954
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NPV ranking: B,C,A (b) Net present value (18%) Project A Year Cash Flow PVIF,18% NPV 0 -10 000 1.000 -10 000 1 8 000 .8475 6 780 2 2 000 .7182 1 436 3 2 000 .6086 1 217 4 1 000 .5158 516 5 115 .4371 50 Total NPV - 1 Project B -25 000 + 15 000 X PVIFA,3,18% X PVIF,2,18% = -1 576 Project C - 15 000 + 5 000 X PVIFA,5,18% = +636 NPV ranking: C (positive NPV), A (just beaks even on NPV), reject B (negative NPV) (c) IRR Project A At an interest rate of 18% the NPV is nil. Therefore the IRR is 18% Project B At an interest rate of 16% the NPV wi l l be: -25 000 + 15 000 X PVIFA,3,6% X PVIF,2,16% = +37 As the NPV is almost zero the IRR will be approximately: 16% Project C 5 000 X PVIFA,5,i% = 15 000 PVIFA,5,i% = 3.0000 i = 20% IRR ranking: C,A,B (d)
Method Independent Mutually Exclusive
NPV – 10% A , B, C B NPV –18% A, C C IRR (10% cost of capital) A, B, C C IRR (18% cost of capital) A, C C
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Using a Sharp EL – 738/735S calculator Project A Clear the calculator: CFi , 2nd F , CA , ON/C 10000 +/- ENT, 8 000 ENT, 2 000 ENT, ENT, 1 000 ENT, 115 ENT,10 I/Y , 2ndF, CASH, ▼ , COMP ; the answer is: +1 182.66 then enter: ▲,18 ENT , ▼ , COMP ; the answer is - 0.65 then enter: ▲, COMP ; the answer is 17.995% Project B Clear the calculator: CFi , 2nd F , CA , ON/C 25 000 +/- ENT , 0 ENT, ENT , 15 000 ENT , ENT , ENT , 10 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is: + 5 828.74 then enter: ▲,18 ENT , ▼ , COMP ; the answer is - 1 577.07 then enter: ▲, COMP ; the answer is 16.04% Project C Clear the calculator: CFi , 2nd F , CA , ON/C 15 000 +/- ENT , 5 000 (x,y) , 5 ENT, 10 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is: + 3 953.93 then enter: ▲,18 ENT , ▼ , COMP ; the answer is + 635.86 then enter: ▲, COMP ; the answer is 19.86%
9.23
Project IRR NPV Payback
P 18% +4 373 3.15 years
Q 14% +1 397 2.32 years
R 16% +4 539 2.80 years
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Using a Sharp EL – 738/735S calculator Project P Clear the calculator: CFi , 2nd F , CA , ON/C 23 000 +/- ENT, 0 ENT, 5 000 ENT, 15 000 ENT, 20 000 ENT, 12 I/Y , 2ndF, CASH, ▼ , COMP ; the answer is: +4 373 Project Q Clear the calculator: CFi , 2nd F , CA , ON/C 43 180 +/- ENT, 25 000 ENT, 15 000 ENT, 10 000 ENT, 5 000 ENT, 2ndF, CASH, COMP ; the answer is: 14% Project R Clear the calculator: CFi , 2nd F , CA , ON/C 53 170 +/- ENT, 19 000 (x,y) , 4 ENT, 12 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is: + 4 540 then enter: ▲, COMP ; the answer is 16%
9.24 Machine A -20 000 + 8 500 x PVIFA,4,12% = 5 817 5 817 PVIFA,4,12% = $1 915 Machine B -30 000 + 10 000 x PVIFA,5,12% = 6 048 6 048 PVIFA,5,12% = $1 678 Recommend - Machine A 9.25
Project L Cash flows: NPV 5 000 X PVIFA,3,20% X PVIF,1,20% 5 000 X 2.1065 X .8333 8 777
Outlay costs -10 000 NPV -1 223
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Using a Sharp EL – 738/735S calculator
Clear the calculator: CFi , 2nd F , CA , ON/C 10 000 +/- ENT , 0 ENT , 5 000 (x,y) , 3 ENT, 20 I/Y , 2ndF , CASH, ▼ , COMP ; the NPV answer is: -1 223 Note: Project L will be rejected as NPV < 0 Net Present Value
Project M
Years 0 1 2 3 4 5
Cash Flows -9 000 3 000 4 000 5 000 6 000 7 000
PVIF 20% 0.8333 0.6944 0.5787 0.4823 0.4019
Total present value 13 879 2 500 2 778 2 894 2 894 2 813
Net present value 4 879 Using a Sharp EL – 738/735S calculator
Clear the calculator: CFi , 2nd F , CA , ON/C 9 000 +/- ENT , 3 000 ENT , 4 000 ENT , 5 000 ENT , 6 000 ENT , 7 000 ENT , 20 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is +4 878
Project N Year 0 1 2 3
Cash Flows -29 000 10 000 15 000 25 000
PVIF 20% 0.8333 0.6944 0.5787
Total present value 33 217 8 333 10 416 14 468
Net present value 4 217 Using a Sharp EL – 738/735S calculator
Clear the calculator: CFi , 2nd F , CA , ON/C 29 000 +/- ENT , 10 000 ENT , 15 000 ENT , 25 000 ENT , 20 I/Y , 2ndF , CASH, ▼ , COMP ; the answer is +4 218
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Equivalent annual cash flows:
Project M 4 879 PVIFA,5,20% = 1 631 Using a Sharp EL – 738/735S calculator
Clear the calculator: CFi , 2nd F , CA , ON/C 4 878 +/- PV , 20 I/Y , 5 N , COMP PMT, the answer is: 1 631
Project N 4 217 PVIFA,3,20% = 2 002 Using a Sharp EL – 738/735S calculator
Clear the calculator: 2nd F , CA , ON/C 4 218 +/- PV , 20 I/Y , 3 N , COMP PMT, the answer is: 2 002 Decision - choose N 9.26 Machine A NPV 1. Cost (-30 000 X 1.0000) -30 000 2. Net cash flows 12 000 X PVIFA,5,14% (3.4331) 41 197 3. Tax on net income 12 000 X .30 X PVIFA,5,14% X PVIF,1,14% 12 000 X .30 X 3.4331 X .8772 -10 841 4. Tax savings on depreciation 6 000 X .30 X PVIFA,5,14% X PVIF,1,14% 6 000 X .30 X 3.4331 X .8772 5 421 5. Residual value 4 000 X PVIF,5,14% (.5194) 2 078
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6. Tax effect on gain on disposal 4 000 X 0.30 X PVIF,5,14% X PVIF,1,14% 4 000 X 0.30 X 0.5194 X 0.8772 - 547 Total NPV 7 308 Equivalent annual cash flow: 7 308 PVIFA,5,14% = 2 129 Machine B NPV 1. Cost (-45 000 X 1.0000) - 45 000 2. Net cash flows 14 000 X PVIFA,10,14% 14 000 X 5.2161 73 025 3. Tax on net income 14 000 X .30 X PVIFA,10,14% X PVIF,1,14% 14 000 X .30 X 5.2161 X .8772 -19 217 4. Tax savings on depreciation 4 500 X .30 X PVIFA,10,14% X PVIF,1,14% 4 500 X .30 X 5.2161 X .8772 6 177 Total NPV 14 985 Equivalent annual cash flow: 14 985 PVIFA,10,14% = 2 873 Decision - choose Machine B Alternative Solution: Machine A NPV
Total present value 120 441 24 562 25 124 19 474 25 135 14 829 12 096 -779
Net present value -20 559 Using a Sharp EL – 738/735S calculator
Clear the calculator: CFi , 2nd F , CA , ON/C 141 000 +/- ENT , 28 000 ENT , 32 650 ENT , 28 850 ENT , 42 450 ENT , 28 550 ENT , 26 550 ENT , 1 950 +/- ENT , 14 I/Y , 2ndF , CASH, ▼ , COMP ; the NPV answer is – 20 564
(ii) Net present value index Net present value 120 441 cash outlay = 141 000 = -14.58%
(b) Decision - do not purchase 9.28
(a) (i) NPV NPV 1. Cost (-250 000 X 1.0000) -250 000 2. Cash flows after tax 72 022 X .70 X PVIFA,8,14% (4.6389) 233 870 3. Tax savings on depreciation 31 250 X .30 X 4.6389 43 490 NPV 27 360
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(a) (ii) Net present value index 27 360 250 000 = 10.94%
(a) (iii) IRR Cash flows after tax 50 415 Depreciation tax savings 9 375 Total After Tax Cash Flows 59 790 59 790 X PVIFA,8,i% = 250 000 i% = 17% (approx) Using a Sharp EL – 738/735S calculator
Clear the calculator: CFi , 2nd F , CA , ON/C 250 000 +/- ENT , 59 790 (x,y) , 8 ENT, 14 I/Y , 2ndF , CASH, ▼ , COMP ; the NPV answer is: 27 358, then enter: ▲, COMP ; the IRR answer is : 17.20%
(b) Decision - buy the machine 9.29 Budget constraint of $850 000.
Ranking on NPV (5,1,6,7) provides a total NPV of $170 000 with total Capital Expenditure of $800 000.
Ranking on IRR (1,4,6,2,7) provides a total NPV of $140 000 with total Capital Expenditure of $700 000.
Ranking using the profitability index (4,5,6,1,2) provides a total NPV of $180 000 with a total Capital Expenditure of $850 000.
Therefore projects will be chosen which maximise the NPV whilst staying within budget constraints.
