Fundamentals of Financial Management (Concise 6th Edition)

A-14 Appendix A Solutions to Self-Test Questions and Problems

NPV Pro! les for Projects X and Y

NPV

($)

4,000

2,000

3,000

1,000

!1,000

5 10 15 20

0

NPV

Crossover Rate = 6.2%

NPV

Cost of Capital

(%)

Y

X

Y IRRx

IRR

Cost of Capital NPVX NPVY

0% $3,500 $4,000

4 2,545 2,705

8 1,707 1,592

12 966 631

16 307 (206)

18 5 (585)

Chapter 12

a. Estimated investment requirements:

Price ($55,000)

Installation ( 10,000)

Change in net working capital ( 2,000)

Total investment ($67,000)

b. Depreciation schedule:

Equipment cost! $65,000; MACRS 3-year class

YEARS

1 2 3

MACRS depreciation rates 33% 45% 15%

Equipment depreciation expense $21,450 $29,250 $9,750

Note that the remaining book value of the equipment at the end of the project’s

life is 0.07 & $65,000! $4,550.

ST-2ST-2