Financial Analysis Spreadsheet Templates

MAIN MENU -- CHAPTER 6

Problem 6-6 Problem 6-9 Problem 6-13

Problem 6-19 Problem 6-27

Corporate Finance by Ross, Westerfield, and Jaffe -- Seventh Edition

Copyright 2005 Irwin/McGraw-Hill and KMT Software, Inc. (www.kmt.com)

Copyright 2005 Irwin/McGraw-Hill File: 353362111.xls Printed: 04/30/2017

 Corporate Finance
Ross, Westerfield, and Jaffe -- Seventh Edition 13%

Problem 6-6 Objective

Compute IRR

Student Name:
Course Name:
Student ID:
Course Number:

Compute the internal rate of return on projects with the following cash flows.

Year Project A Project B

0 ($3,000) ($6,000)
1 $2,500 $5,000
2 $1,000 $5,000

Solution
Problem 6-6
Instructions
Use the Excel IRR function to solve the requirements of this problem.

Project A IRR 12.9%

Project B IRR 42.0%

Copyright 2005 Irwin/McGraw-Hill FAST Workbooks by Ross, Westerfield, and Jaffe Problem: 6-6
 Corporate Finance
Ross, Westerfield, and Jaffe -- Seventh Edition

Problem 6-9 Objective

Evaluate an investment using IRR and NPV

Student Name:
Course Name:
Student ID:
Course Number:

Suppose you are offered $5,000 today but must make the following payments.

Cash
Year Flows
0 $5,000
1 ($2,500)
2 ($2,000)
3 ($1,000)
4 ($1,000)

a. What is the IRR of this offer?

b. If the appropriate discount rate is 10 percent, should you accept this offer?
c. If the appropriate discount rate is 20 percent, should you accept this offer?
d. What is the NPV of the offer if the appropriate discount rate is 10 percent? 20 percent?
e. Are the decisions under the NPV rule in part (d) consistent with those of the IRR rule?

Solution
Problem 6-9
Instructions
Use formulas and the Excel IRR and NPV functions to solve the requirements of this problem.

a. What is the IRR of this offer?

IRR 13.99%

b. If the appropriate discount rate is 10 percent, should you accept this offer?

Accept of reject? Rechazar, porque es tipo pestamo. TIR mayor que TREMA
c. If the appropriate discount rate is 20 percent, should you accept this offer?

Accept of reject? Aceptar, TIR menor que TREMA

d. What is the NPV of the offer if the appropriate discount rate is 10 percent? 20 percent?

10% 20% Se agregan 5000 para quitar lo bruto.

NPV ($359.95) $466.82
es neg
e. Are the decisions under the NPV rule in part (d) consistent with those of the IRR rule?
Si son concistentes, aceptan cuando deben aceptar y rechazan cuando deben rechazar

Copyright 2005 Irwin/McGraw-Hill FAST Workbooks by Ross, Westerfield, and Jaffe Problem: 6-9
 Corporate Finance
Ross, Westerfield, and Jaffe -- Seventh Edition

Problem 6-13 Objective

Calculate profit indices

Student Name:
Course Name:
Student ID:
Course Number:

Suppose the following two independent investment opportunities are available to Greenplain, Inc. The appropriate
discount rate is 10 percent.

Project Project
Year Alpha Beta
0 ($500) ($2,000)
1 300 300
2 700 1,800
3 600 1,700

a. Compute the profitability indices for each of the two projects.

b. Which project(s) should Greenplain accept based on the profitability index rule?

Solution
Problem 6-13
Instructions
Use formulas and the NPV function to solve the requirements of this problem.

a. Compute the profitability indices for each of the two projects.

Discount rate 10%

Project Project
Alpha Beta
NPV $802.03 $1,037.57
PI 2.60 1.52

b. Which project(s) should Greenplain accept based on the profitability index rule?
Se elige el proyecto alfa ya que te devuelve mas por cada peso.
Pero realmente debe elegirse el beta ya que toma en cuenta el tama;o de lainversion.

Copyright 2005 Irwin/McGraw-Hill FAST Workbooks by Ross, Westerfield, and Jaffe Problem: 6-13
 Corporate Finance
Ross, Westerfield, and Jaffe -- Seventh Edition

Problem 6-19 Objective

Evaluate two mutually exclusive projects.

Student Name:
Course Name:
Student ID:
Course Number:

Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation
Corporation (BRC). Both projects require an annual return of 15%.

Deepwater New Submarine

Year Fishing Ride
0 ($600,000) ($1,800,000)
1 270,000 1,000,000
2 350,000 700,000
3 300,000 900,000

As a financial analyst for BRC, you are asked the following questions.
a. Based on the discounted payback period rule, which project should be chosen?
b. If your decision rule is to accept the project with a greater IRR, which project should you choose?
c. Since you are fully aware of the IRR rule's scale problem, you can calculate the incremental IRR for the
cash flows. Based on#NAME?
d. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it
consistent with the incremental IRR rule?
e. Compute the profitability indices for each of the two projects.

Solution
Problem 6-19
Instructions
Use formulas and the Excel IRR and PV functions to solve the requirements of this problem.

a. Based on the discounted payback period rule, which project should be chosen?

15%
Deepwater Discounted Cumulative
Year Fishing Cash Flow Cash Flow
0 ($600,000)
1 $270,000 $234,783 $234,783
2 $350,000 $264,650 $499,433
3 $300,000 $197,255 $696,688

Discounted payback period 2.51 years

15%
New Submarine Discounted Cumulative
Year Ride Cash Flow Cash Flow
0 ($1,800,000)
1 $1,000,000 $869,565 $869,565
2 $700,000 $529,301 $1,398,866
3 $900,000 $591,765 $1,990,630

Discounted payback period 2.68 years

Which project should be chosen?

Deepwater Fishing

b. If your decision rule is to accept the project with a greater IRR, which project should you choose?

Deepwater New Submarine

Year Fishing Ride
0 ($600,000) ($1,800,000)
1 $270,000 $1,000,000
2 $350,000 $700,000
3 $300,000 $900,000
IRR 24.3% 21.5%

Which project should you choose?

Deepwater Fishing

c. Since you are fully aware of the IRR rule's scale problem, you can calculate the incremental IRR for the
cash flows. Based on your computation, which project should you choose?

0 1 2 3
Incremental cash flows ($1,200,000) $730,000 $350,000 $600,000
IRR 19.92%

Which project should you choose?

New Submarine Ride

d. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it
consistent with the incremental IRR rule?

Discount rate 15%

Deepwater New Submarine

Year Fishing Ride
0 ($600,000) ($1,800,000)
1 $270,000 $1,000,000
2 $350,000 $700,000
3 $300,000 $900,000
NPV $96,687.76 $190,630.39

Which project should you choose?

New Submarine Ride

Is it consistent with the incremental IRR rule? Si

e. Compute the profitability indices for each of the two projects.

Discount rate 15%

Deepwater New Submarine

Year Fishing Ride
0 ($600,000) ($1,800,000)
1 $270,000 $1,000,000
2 $350,000 $700,000
3 $300,000 $900,000
PI ($1.16) ($1.11)

Which project should you choose?

Deepwater Fishing

Copyright 2005 Irwin/McGraw-Hill FAST Workbooks by Ross, Westerfield, and Jaffe Problem: 6-19
 Corporate Finance
Ross, Westerfield, and Jaffe -- Seventh Edition

Problem 6-27 Objective

Evaluate two mutually exclusive projects.

Student Name:
Course Name:
Student ID:
Course Number:

Consider the following cash flows on two mutually exclusive projects for Tokyo Rubber Company.
Assume the discount rate for Tokyo Rubber Company is 10 percent and the minimum acceptable IRR is
30 percent.

Dry Solvent Flujos

Year Prepreg Prepreg incrementales
0 ($1,000,000) ($500,000) ($500,000)
1 600,000 500,000 $100,000
2 400,000 300,000 $100,000
3 1,000,000 100,000 $900,000

a. Based on the payback period, which project should be taken?

b. Based on the NPV, which project should be taken?
c. Based on the IRR, which project should be taken?
d. Based on the above analysis, is incremental IRR analysis necessary? If yes, please conduct the analysis.

Solution
Problem 6-27
Instructions
Where appropriate, use formulas and the Excel IRR and NPV functions to solve the requirements of this problem.

a. Based on the payback period, which project should be taken?

Dry Cumulative Solvent Cumulative

Year Prepreg Cash Flows Prepreg Cash Flows
0 ($1,000,000) ($500,000)
1 600,000 600,000 500,000 500,000
2 400,000 1,000,000 300,000 800,000
3 1,000,000 2,000,000 100,000 900,000

Dry Solvent
Prepreg Prepreg
Payback Period 2 1
Decision Solvent Prepeg

b. Based on the NPV, which project should be taken?

Discount rate 10%

Dry Solvent
Prepreg Prepreg
NPV $627,347.86 $277,610.82

Decision Dry Prepeg

c. Based on the IRR, which project should be taken?

Dry Solvent
Prepreg Prepreg
IRR 39.79% 49.20%

Decision Solvent Prepreg

d. Based on the above analysis, is incremental IRR analysis necessary? If yes, please conduct the analysis.

Si, porque es un anlisis complementario de NPV y de Payback

Dry Solvent Incremental
Year Prepreg Prepreg Cash Flows
0 ($1,000,000) ($500,000) ($500,000)
1 600,000 500,000 $100,000
2 400,000 300,000 $100,000
3 1,000,000 100,000 $900,000

IRR 34.45%

Copyright 2005 Irwin/McGraw-Hill FAST Workbooks by Ross, Westerfield, and Jaffe Problem: 6-27
PROBLEMA 1. Multigig Computer Corporation trata de evaluar el siguiente proyecto
de diseo, con tasa requerida de 12%:
AO Flujo de
efectivo I a) paybak 1.76
0 -15000 b) discounted $2.10
1 8,500 $7,589.29 $7,589.29 c) NPV $5,415.57
2 8,500 $6,776.15 $14,365.43 d) TIR 32.07%
3 8,500 $6,050.13 $20,415.57 e) IR 1.36
nte proyecto