1. 2. What is the NPV of the above project? The firm’s WACC is 5.8%
MGT 326 HW 5 Solution
1. What is the Discounted Payback Period of a project with the cash flows depicted below? The firm’s WACC is 5.8%
$170k
$145k
$130k
$89k
$94k 1 2 3 4 5 6
$50k
$370k
Period 1 2 3 4 5 6 CF
-$370.00
-$50.00
$89.00
$130.00
$145.00
$170.00
$94.00
PV0
-$47.26
$79.51
$109.77
$115.72
$128.24
$67.02
Net Cum CFs
-$417.26
-$337.75
-$227.98
-$112.25
$15.98
Discounted Payback:
4 +
0.875
= 4.875 /
2. What is the NPV of the above project? The firm’s WACC is 5.8%
CF, 2nd, CLR WORK (Clears Cash Flow Registers)
-370, ENTER
↓, -50, ENTER
↓, ↓, 89, ENTER
↓, ↓, 130, ENTER
↓, ↓, 145, ENTER
↓, ↓, 170, ENTER
↓, ↓, 94, ENTER
NPV, 5.8, ENTER
↓, CPT; NPV = $83.01 1 1

2. Proj B (Must use the common life approach)
MGT 326 HW 5 Solution
3. A firm is considering two mutually exclusive projects that have the annual cash flows shown below. Based on NPV analysis, which project should be accepted? The required rate of return is %
Year 1 2 3 4 5 6
Project A
CFs
-$60.00
$18.00
Project B
-$45.00
$30.00
NPVA = $25.80 Accept Project A; highest NPV
NPVB = $24.36
Proj A
$18
$18
$18
$18
$18
$18 4 5 6 1 2 3
$60
NPV = [N=6, I/Y=7, PMT=18; CPT, PV] - $60
= $ $60
= $25.80
Proj B (Must use the common life approach)
$30
$30
$30
$30
$30
$30 4 5 6 1 2 3
$45
$45
$45
CF, 2nd, CLR WORK (Clears Cash Flow Registers)
-45, ENTER
↓, 30, ENTER
↓, ↓, -15, ENTER
↓, ↓, 30, ENTER
NPV, 7, ENTER
↓, CPT; NPV = $24.36

3. 4 A firm is considering two mutually exclusive projects that have the annual cash flows shown below. Project A is a moderately risky project while Project B is considered to have a high degree of risk.
The firm’s WACC is 7.34%. The firm uses the risk-adjusted discount rate method to account for project risk. Projects posing minimal risk are evaluated using WACC for the discount rate. Using the WACC as a base, 1.25% is added for moderately risky projects and 2.50% is added for significantly risky projects.
The NPV of Project A is: -$13.86
The NPV of Project B is: -$32.18
Year
Proj A
Proj B
-$215.00
-$295.00 1
$65.00
$57.00 2
$63.00
$75.00 3
$60.00
$97.00 4
$110.00
Which project should be adopted?
Project A: (Moderate Risk)
CF, 2nd, CLR WORK (Clears Cash Flow Registers)
-215, ENTER,
↓, 65, ENTER
↓, ↓, 63, ENTER
↓, ↓, 60, ENTER
↓, ↓, 57, ENTER
NPV, 8.59, ENTER (radjusted = 7.34% % = %)
↓, CPT: NPV = -$13.86
Project B: (High Risk)
-295, ENTER,
↓, 57, ENTER
↓, ↓, 75, ENTER
↓, ↓, 97, ENTER
↓, ↓, 110, ENTER
NPV, , ENTER (radjusted = 7.34% + 2.5% = 9.84%)
↓, CPT: NPV = -$32.18
Adopt neither project
Homework 5