# Corporate Finance Essay

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Ch. 5: 1 (a-e), 4, 5, 7, 10, 11, 12, 15

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FM1 Takumi KAWAI, Pham NGUYEN, Yang CHEN, Bi CHAO

#1

a. What is the payback period on each of the following projects?

Payback period: A 3 years, B 2 years, C 3years

b. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept?

“B” Only B meetsthe given cutoff period.

c. If you use a cutoff period of three years, which projects would you accept?

“A, B, C” All the projects meet the given cutoff period, thus, every project (A, B, C) is acceptable.

(In terms of NPV, since B has the

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Suppose you have the following investment opportunities, but only $90,000 available for investment. Which projects should you take?

The best combination of projects has the highest Profitability index. According to the Solver, it can be concluded that projects #1, 2, 4, 6 are to be taken. This combination also meets the budget constraint of $90,000.

#10 Calculate the IRR (or IRRs) for the following project, for what range of discount rates does the project have positive NPV?

As the result of Solver, IRR can be either 45.3% or -17.4%. NPV can be positive in IRR ranging from -17.4% to 45.3% (ex. If IRR=0%, NPV is $500).

#11

Consider the following two mutually exclusive projects:

a. Calculate the NPV of each project for discount rates of 0, 10, and 20%. Plot these on a graph with NPV on the vertical axis and discount rate on the horizontal axis.

b. What is the approximate IRR for each project?

The approximate IRRs are 13.1% for Project A, and 11.9% for Project B.

c. In what circumstances should the company accept project A?

Comparing the cost of capital and IRR, if the cost of capital is smaller than IRR of Project A, this project A is worth accepting.

d. Calculate the NPV of the incremental investment (B - A) for discount rates of 0, 10, and 20%. Plot these on your graph. Show that the circumstances in which you would accept A are