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FIN 125 Exam 2: Chapter 9 Problems
Jeremiah




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Add each of the future cash flows to the cost until the next cash flow will overflow it.


Take the remaining, divide it by the next cash flow, and add the count of cash flows
before it.


The payback period for project A: 25,700+53,700+58,000=136,700 (recover
w/o going over the cost)
The payback period for project A: 3 + (218,917-136,700)/420,000 = 3.20



Choose matching term




Year Cash Flow (A) Cash Flow (B)
0 -$218,917 -$16,419
1 25,700 5,985
2 53,000 8,370
1
3 58,000 13,931
4 420,000 8,655
Whichever project you choose, if any, you require a 6 percent return on your investment. What is the
IRR (in %) for Project A?




You are considering two mutually exclusive projects. Project A has cash flows of −$125,000, $51,400,
$52,900, and $63,300 for Years 0 to 3, respectively. Project B has cash flows of −$85,000, $23,100,
2 $28,200, and $69,800 for Years 0 to 3, respectively. Project A has a required return of 9 percent while
Project B's required return is 11 percent. Should you accept or reject these mutually exclusive projects
based on IRR analysis?
FIN 125 Exam 2: Chapter 9 Problems




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