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11. Caledonia is considering two investments with

Resolved Question:

11.

Caledonia is considering two investments with one-year lives. The more expensive of the two is the better and will produce more savings. Assume these projects are mutually exclusive and that the required rate of return is 10 percent. Given the following after-tax net cash flows: YEAR PROJECT A PROJECT B 0 –$195,000 –$1,200,000 1 240,000 1,650,000 1. Calculate the net present value. 2. Calculate the profitability index. 3. Calculate the internal rate of return. 4. If there is no capital-rationing constraint, which project should be selected? If there is a capital-rationing constraint, how should the decision be made?

12.

Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows: YEAR PROJECT A PROJECT B 0 –$100,000 –$100,000 1 32,000 0 2 32,000 0 3 32,000 0 4 32,000 0 5 32,000 $200,000

The required rate of return on these projects is 11 percent. 1. What is each project’s payback period? 2. What is each project’s net present value? 3. What is each project’s internal rate of return? 4. What has caused the ranking conflict? 5. Which project should be accepted? Why?

13.

The final two mutually exclusive projects that Caledonia is considering involve mutually exclusive pieces of machinery that perform the same task. The two alternatives available provide the following set of after-tax net cash flows:

YEAR EQUIPMENT A EQUIPMENT B 0 –$100,000 –$100,000 1 65,000 32,500 2 65,000 32,500 3 65,000 32,500 4 Â 32,500 5 Â 32,500 6 Â 32,500 7 Â 32,500 8 Â 32,500 9 Â 32,500

Equipment A has an expected life of three years, whereas equipment B has an expected life of nine years. Assume a required rate of return of 14 percent.

1. Calculate each project’s payback period. 2. Calculate each project’s net present value. 3. Calculate each project’s internal rate of return. 4. Are these projects comparable? 5. Compare these projects using replacement chains and EAAs. Which project should be selected? Support your recommendation.

What formulas did you use to solve these questions? I have seen multiple formulas and want to know what one to use to get the proper answer. I normally try and solve these by hand and then type them out in an MS Word document, so I like to be able to show how I did it by hand.

I used formulas present in excel for IRR. For NPV I did it from the most basis method that is multiplying the cash flow of each year with the present value factor of that year and then adding all the present values. For payback period its the period in which the original investment is recovered. Let me know if you need any further explanation, I would be happy to assist you.

Will you please show me the formula? I have a hard time understanding what formula is used when it is described. I do better with actually seeing the formula itself written out. Also, where do you go in Excel to be able to find and perfrom the other calculations?

If it is not too much trouble, I would prefer MS Word document. I like to be able to see what formula I am using, and then write it out in MS word so that it shows exactly what I am doing. This is about the only way I can understand financial formulas.

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