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Assignment 5

Jaime Lievano (2205932)

University Canada West
FNCE 623: Financial Management
Professor Sujatha Selvaraj
March 3rd, 2023
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Chapter 9

1. Question 2

Calculating Payback (L02) An investment project provides cash inflows of $585 annually for
eight years. What is the project payback period if the initial cost is $1,700? What if the initial
cost is $3,300? What if it is $4,900?

Cost of Capital Investment: $ 1,700.00

$
Net Annual Cash Flow:
585.00
Cash Payback Period = Cost of Capital Investment / Net Annual Cash
Flow
Cash Payback Period = 1700 /
585
Cash Payback Period = 2.91 Years

Cost of Capital Investment: $ 3,300.00

$
Net Annual Cash Flow:
585.00
Cash Payback Period = Cost of Capital Investment / Net Annual Cash
Flow
Cash Payback Period = 3300 /
585
Cash Payback Period = 5.64 Years

Cost of Capital Investment: $ 4,900.00

$
Net Annual Cash Flow:
585.00
Cash Payback Period = Cost of Capital Investment / Net Annual Cash
Flow
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Cash Payback Period = 4900 /

585
Cash Payback Period = 8.38 Years

2. Question 4

Calculating Discounted Payback (L03) An investment project has annual cash inflows of $4,200,
$5,300, $6,100, and $7,400, and a discount rate of 14%. What is the discounted payback period
for these cash flows if the initial cost is $7,000? What if the initial cost is $10,000? What if it is
$13,000?

Period YEARS
4
Discount Rate 14 %

(n) Periods Cash flow Formula Present Value Cumulative

$
1 0.88 $ 3,684.21 CAD $ 3,684.21
4,200.00
$
2 0.77 $ 4,078.18 CAD $ 7,762.39
5,300.00
$
3 0.67 $ 4,117.33 CAD $ 11,879.71
6,100.00
$
4 0.59 $ 4,381.39 CAD $ 16,261.11
7,400.00

Initial Cost: $ 7,000.00

Calculating the difference Between Years 2 and 1
$7,762.39 - $3,762.39 = $4,078.18
$7,000.00 - $3,762.39 = $3,315.79
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Applying the rule of three

1 Year
$4,078.18
$3,315.79 x year
$4078.18 x = $3315.79 x 1
x = $ 3315.79 / $4088.18
x = 0.813056603773585
Cash Payback Period = 1 + 0.813 = 1.813 Years

Initial Cost: $ 10,000.00

Calculating the difference Between Years 3 and 2
$11,879.71 - $7,762.39 = $4,117.33
$10,000.00 - $7,762.39 = $2,237.61
Applying the rule of three

1 Year
$4,117.33
$2,237.61 x year
$4,117.33 x = $2,237.61 x 1
x = $2,237.61 / $4,117.33
x = 0.543462295081968
Cash Payback Period = 2 + 0.543 = 2.543 Years

Initial Cost: $ 13,000.00

Calculating the difference Between Years 4 and 3
$16,261.11 - $11.879.71 = $4,381.39
$13,000.00 - $11,879.71 = $1,120.29
Applying the rule of three
1 Year
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$4,381.39
$1,120.29 x year
$4,381.39 x = $1,120.29 x 1
x = $1,120.29 / $4,381.39
x = 0.255691524324325
Cash Payback Period = 3 + 0.255 = 3.255 Years

3. Question 12

Parkallen Inc. has identified the following two mutually exclusive projects:

IRR DECISION RULE

Annual cash flows: Project A Project B
Year 0 $(29,000) $(29,000)
Year 1 $14,400 4,300
Year 2 $12,300 9,800
Year 3 $9,200 15,200
Year 4 $5,100 16,800
IRR 18.56% 17.42%
These values were obtained using the Excel formula IRR without a Guess.

As the Parkallen Inc. projects are mutually exclusive, they must select project A, which has the
higher Internal Rate of Return because the investment will grow at a higher rate.

NPV DECISION RULE

Annual cash flows: Project A Project B
Year 0 $(29,000) $(29,000)
Year 1 $14,400 4,300
Year 2 $12,300 9,800
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Year 3 $9,200 15,200

Year 4 $5,100 16,800
IRR 11.00% 11.00%
Calculating the NPV of Each Project
Initial Investment - Net present value

Net Present Value = Cash inflows / (1+i)^n

Project A $4,042
Project B $5,009
As the Parkallen Inc. projects are mutually exclusive, they must select project B with the higher
Net Present Value.
With this, Parkallen will capture a better value for this investment opportunity.

PROJECT A AND PROJECT B SAME NPV

Annual cash flows: Project A Project B
Year 0 $(29,000) $(29,000)
Year 1 $14,400 4,300
Year 2 $12,300 9,800
Year 3 $9,200 15,200
Year 4 $5,100 16,800
IRR 14.8313%
Performing a What-if analysis in Excel using the goal and seek function, we found the X value,
which makes Project A NPV - Project B NPV = 0

Project A $1,877
Project B $1,877
Project A NPV - Project B NPV = 0 $(0)
The obtained IRR where Project A and Project B NPV are the same is 14.83%.
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Chapter 12

4. Question 1

Suppose a stock had an initial price of $79 per share, paid a dividend of $ 1.45 per share during
the year, and had an ending share price of $88. Compute the percentage of total return.

Total Return = (Closing Value – Opening Value) of Investments +

Earnings
Opening Value: $79
Closing Value: $88
Earnings: $1.45
Total Return = $88 - $79 + $1.45
Total Return = $10.45

5. Question 7

Calculating Returns and Variability (LOI) Using the following returns, calculate the arithmetic
average returns, the variances, and the standard deviations for X and Y.

Average Deviation Squared D

Year x
Return (x - ar) D^2
1 15% 9.2% 5.8% 0.34%
2 26% 9.2% 16.8% 2.82%
3 7% 9.2% -2.2% 0.05%
4 -13% 9.2% -22.2% 4.93%
5 11% 9.2% 1.8% 0.03%
Total 0.000% 8.17%
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Sum Up annual returns x = 15% + 26% + 7% - 13% + 11%

Sum Up annual returns x = 46%
Arithmetic Average return x = 46% / 5
Arithmetic Average return x = 9.2%
Variance = 8.17% / (5-1) = 2.04%
SD = Root (2.04%) = 14.29%

Average Deviation Squared D

Year y
Return (x - ar) D^2
1 21% 11.8% 9.2% 0.85%
2 36% 11.8% 24.2% 5.86%
3 13% 11.8% 1.2% 0.01%
4 -26% 11.8% -37.8% 14.29%
5 15% 11.8% 3.2% 0.10%
Total 0.000% 21.11%

Sum Up annual returns y = 21% + 36% + 13% - 26% + 15%

Sum Up annual returns y = 59%
Arithmetic Average return y = 59% / 5
Arithmetic Average return y = 11.8%
Variance = 21.11% / (5-1) = 5.28%
SD = Root (5.28%) = 22.97%

6. Question 16

A stock has had the following year-end prices and dividends: What are the arithmetic and
geometric returns for the stock?

Year Price Dividend Return Year

$
1
60.18
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$
2 $ 0.60 23%
73.66
$
3 $ 0.64 29%
94.18
$
4 $ 0.72 -4%
89.35
$
5 $ 0.80 -11%
78.49
$
6 $ 1.20 23%
95.05

Calculate the return for each year

R1 = ( $73.66 - $60.18 + $0.6 ) / $60.18 = 0.23
R2 = ( $94.18 - $73.66 + $0.64 ) / $73.66 = 0.29
R3 = ( $89.35 - $94.18 + $0.72 ) / $94.18 = -0.04
R4 = ( $78.49 - $89.35 + $0.8 ) / $89.35 = -0.11
R5 = ( $95.05 - $78.49 + $1.2 ) / $78.49 = 0.23

Arithmetic Average = (0.23 + 0.29 - 0.04 - 0.11 + 0.23) / 5

Arithmetic Average = %11.825

Geometric Average = ( (1+0.23) x (1+0.29) x (1-0.04) x (1-0.11) x (1+0.23) ) ^ 1/5 - 1

Geometric Average = %10.58
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List of References

Garg, V. (2022, December 6). Total Return Formula. WallStreetMojo.

https://www.wallstreetmojo.com/total-return-formula
How to Calculate Arithmetic Average - Macroption. (n.d.). https://www.macroption.com/how-
to-calculate-arithmetic-average
Standard deviation. (n.d.). https://www.math.net/standard-deviation
Ross, A. (2023). Fundamentals of corporate finance. McGraw Hill. Tenth Canadian Edition.