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JHU Financial and Contract Management Module 9 Assignment

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Management

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Johns Hopkins University

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Basis: Block, S.B.G .A.Hirt, and B.R. Danielsen, "Foundations of Financial Management", McGraw-Hill.
Module 9 Assignment (V2Aug16)
595.466 Financial and Contract Management
Problems are to be solved using either the tables or TVM formulas discussed in the lectures.
Calculate IRR problems using the 4-step process and interpolation.
Standard uses of Excel (rack & stack, embedding the above TVM formulas in a cell, etc.) are OK.
Do not use Excel functions eg. =+NPV(rate,cash flow values) or financial calculators.
1. The Hutchins Company makes an investment of $15,600 that provides the following cash flows:
___________________________________
Year Cash Flows
1 $7,500
2 7,000
3 4,500
a. What is the net present value at a 10 percent discount rate?
b. What is the internal rate of return? (Please use the interpolation process to calculate the solution)
c. Assuming an 10% cost-of-capital rate, would you make the same decision for both part a and part b?
Answers:
a.
Total
Investment
$ 15,600.00
Rate (%)
10
Year
Cash Flow
PV_if @ 10%
Discounted Cash
Flows
1
$ 7,500.00
0.909
$ 6,818.18
2
$ 7,000.00
0.826
$ 5,785.12
3
$ 4,500.00
0.751
$ 3,380.92
Total Discounted Net Flows
$ 15,984.22
Total Investment
$ 15,600.00
Net Present Value
$ 384.22
b. Step 1
Year
Cash Flow
1
$ 7,500.00
2
$ 7,000.00
3
$ 4,500.00
Sum of CF
$ 19,000.00

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Showing Page:
2/5
Basis: Block, S.B.G .A.Hirt, and B.R. Danielsen, "Foundations of Financial Management", McGraw-Hill.
"Annuity"
(Cash Flow
Average)
$ 6,333.33
PVA_IFA
2.463
Step 2 Look into Appendix D for Period =3 and PVA
IFA
= 2.463 returns Percent between 10% and 11%
Step 3 11% first approximation
Cash Flow
PV_IF @ 11%
Discounted Cash
Flows
$ 7,500.00
0.901
$ 6,756.76
$ 7,000.00
0.812
$ 5,681.36
$ 4,500.00
0.731
$ 3,290.36
Total Discounted Net Flows
$ 15,728.48
Greater than $15,600.00.
Step 4 Try 12%
Cash Flow
PV_IF @ 12%
Discounted Cash
Flows
$ 7,500.00
0.893
$ 6,696.43
$ 7,000.00
0.797
$ 5,580.36
$ 4,500.00
0.712
$ 3,203.01
Total Discounted Net Flows
$ 15,479.80
Less than $15,600.00
Interpolation:
PV @ 11%
$ 15,728.48
PV @ 12%
$ 15,479.80
Factor A
248.6781759
Factor B
128.4750053
IRR (%)
11.52
c. IRR > Cost of Capital, therefore the decision would be yes for part b. For the part a, NPV is gre