Chapter 24: Exercises

Payback Period and Depreciation Adjustment (Exercises 24-1 to 24-4) 1. Exercise 24-1: o Calculate annual net cash flow for each project, then compute the payback period: Payback Period=Initial InvestmentAnnual Net Cash Flow 2. Exercise 24-2: o Compute the annual income and net cash flow (which includes adding back non-cash expenses like depreciation). o Determine the payback period using the formula above. 3. Exercise 24-3: o For unequal cash flows, calculate cumulative cash flows year-byyear until the investment is recovered. 4. Exercise 24-4: o Follow the same steps as Exercise 24-3, but consider depreciation as a non-cash expense. Accounting Rate of Return (ARR) and Payback Period (Exercises 24-5 to 246) 5. Exercise 24-5: o Compute ARR for each project: ARR=Annual IncomeAverage Investment o Compare projects based on ARR. 6. Exercise 24-6: o Calculate the annual net cash flow by adjusting for depreciation if necessary. o Find the payback period. o Calculate ARR to complete the analysis. Net Present Value (NPV) with Unequal Cash Flows (Exercises 24-7 to 24-12) 7. Exercise 24-7 and 24-8: o Using the company’s required return (10%), compute the NPV for each investment by discounting the net cash flows. o Decision: Accept if NPV > 0. 8. Exercise 24-9: o Calculate payback periods for both projects. o Find NPV by discounting each cash flow and then compare NPVs to identify the preferred project. 9. Exercises 24-10 to 24-12: o o Compute each project’s NPV and Profitability Index: Profitability Index=Present Value of Cash FlowsInitial Investment Choose the project with the higher profitability index. NPV of Annuity (Exercises 24-13 to 24-14) 13. Exercise 24-13: o Calculate the NPV of an annuity using the given rate of return (8%). 14. Exercise 24-14: o For each project, use the NPV formula with an annuity factor based on the project life (7 years for Project 1 and 5 years for Project 2). Internal Rate of Return (IRR) Analysis (Exercises 24-15 to 24-23) 15. Exercise 24-15: o Determine IRR by finding the rate that yields an NPV of zero. o Compare IRR with the hurdle rate (9.5%). 16. Exercise 24-16: o (a) Based on payback period, (b) NPV, and (c) IRR, decide which project to prioritize. 17. Exercise 24-17: o Calculate NPV using the company’s required return (10%) to determine if the project is desirable. o Determine whether IRR is above or below 10% based on the NPV result. 18. Exercise 24-18: o Calculate NPV for each project and infer whether IRR exceeds 12% based on whether NPV is positive. 19. Exercise 24-19: o Calculate the NPV of the project and infer if the IRR is above 12% based on whether NPV is positive. 20. Exercise 24-20A to 24-22A: o Set up an Excel spreadsheet to calculate IRR for each exercise, comparing results to see if the projects meet company requirements. Break-Even Time (Exercise 24-23) 23. Exercise 24-23: o Calculate cumulative discounted cash flows using the present value of net cash flows. The break-even time is the point at which cumulative cash flows equal the initial investment. This structure will help you solve each exercise step-by-step by calculating key figures such as payback period, NPV, ARR, and IRR as required, then making investment recommendations based on the results.