For G, do we need further explanations than the following?

The NPV and IRR methods give different recommendations because they have different assumptions about unused cash. The NPV rule assumes that unused cash earns the opportunity cost of capital; the IRR rule assumes that unused cash earns the internal rate of return.

I did the homework, but I have no idea if my answers are right. Can anyone compare their results with me? Thanks!

Ex 4.1
(a) 37.47 (b) 44.04 (c) project #2 (d) 19.73% (e) 18.68% (f) project #1

Ex 4.2
(a) 50 (b) 44 (c) project #1 (d) 16.65% (e) 18.69% (f) project #2

Gordon

You can answer these by using the Cash-Flow functionality of a financial calculator. I'll describe how to do so using the TI BAII Plus (similar steps will be used on other financial calculators).

Press the CF button on the BAII Plus. Set the cash-flows as

CFo = -400 (initial cash-flow)
C01 = 220 (first cash-flow)
F01 = 1 (number of times it occurs)
C02 = 310 (second unique cash-flow)
F02 = 1 (number of times it occurs)

Note: you can use the F** variable to deal with repeated values: e.g. cash-flows -400, 220, 220, 310 would only require you to change F01 to 2 rather than inserting a third cash-flow between the first and the second.

To set each of these values type

400- ENTER DOWN 220 ENTER DOWN 1 ENTER DOWN 310 ENTER DOWN 1 ENTER DOWN

Make sure that you delete any other cash flows (C03, C04, etc) by pressing DEL on any extra cash-flow stored from a previous calculation. Then press

IRR CPT

to compute the internal rate of return.

Note: you can also calculate net present values using the cash-flow functionality. Enter the cash-flows as before, then press the NPV button. Enter the interest rate, 10% say, then press CPT:

I = 10
NPV = CPT

Do this with the following keystrokes (after you've pressed the NPV button):

10 ENTER DOWN CPT

Can anyone tell me which calculator could solve hw4.1 d&e?  Thanks.

 

I was wondering about this as well. NEAS, can you verify this?

[NEAS: Assume cash flows occur at the beginning of each year, the end of each, or the middle of each year. Just be consistent with the same point in each year.]

I assumed these transactions happened at the beginning of the year because it wasn't stated clearly in the homework, and I figured I'd do less work to understand the same concept. Also, Mr. Neas and Ms. Vee stated in the assignment that you could use a QUADRATIC equation to solve for IRR, implying that there are squares, but no cubes.

Conclusion: Do it however you want, but make sure you understand the concept.

[NEAS: Correct: An exam problem might use a two period IRR equation, not a three period equation.]

For questions 4.1 & 4.2, the initial investment takes place in Year 1. Is this the beginning of Year 1 or the end of Year 1?

I ask because I was discussing this problem with a coworker that is also taking the course, and he believes the question is saying the initial investment takes place at t=1 and that the other cash flows are at t=2, t=3, and t=4. Therefore, he thinks, in the case of 4.1, for example, that the NPV should be considered at t=0. So he says the NPV is -400/1.13 + 220/1.13^2 + 310/1.13^3

I initially thought the answer was simply -400 + 220/1.13 + 310/1.13^2, but now, after discussing this with him, I'm not so sure.

I also did the same thing and noted in my homework that I've assumed the cash flows occurred at the end of each year. Is this okay?

For the final exam, if the question does not state whether the cash flow occurs at the beginning or the end of the year, should I always assume it occurs at the end of the year?

[NEAS: Yes.  The exam problems should specify when the cash flow occurs.]

i am also having trouble with the part Gs of this homework. any help?

[NEAS: See the thread on practice problems, which discusses the IRR vs NPV perspectives.]