Question

Q 2

Consider the following cash flows for the two investments. What are the payback periods on the two investments?

Year	Investment A	Investment B
0	-$100	-$100
1	58	31
2	73	58
3	87	180

Question options:

1-	Project A 1.58 years; Project B 2.53 years
2-	Project A 1.46 years; Project B 2.21 years

''''''''''''''''''''''''''''' Q 3 You are in the lucky situation of having several customers that want to place large orders with your firm. Unfortunately you do not have the capacity to accept all of them and each order will require the purchase of a new machine. Your boss wants to know what rate of return you would get from each of the orders so that she can decide which one to accept and which ones to pass on to your competitors. Realizing the problems with IRR, you decide to use MIRR instead. Suppose you are going to select two of these three orders. Which projects should you recommend if the company’s required return is 16%? Year Order 1 Order 2 Order 3 0 -$30,000 -$50,000 -$43,000 1 15,000 70,000 34,000 2 27,000 -19,000 28,000 Question options: 1- Order 1 and Order 2 2- Order 1 and Order 3 '''''''''''''''''''''''''''''''''''''''''''' Q 4 DeeDee Industries must choose between a gas-powered and an electric-powered forklift for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one.   The electric-powered forklift will cost $22,000, whereas the gas-powered forklift will cost $17,600. The cost of capital that applies to both investments is 10%. The life for both types of forklift is estimated to be 6 years, during which time the net cash inflows for the electric-powered forklift will be $6,600 per year and those for the gas-powered forklift will be $5,300 per year. Annual net cash inflows include depreciation expenses. Calculate the NPV for each forklift, and decide which to recommend for purchase. Question options: 1- Purchase electric with an NPV of $6,744.72 which is greater than gas with an NPV of $5,482.88. 2- Purchase electric with an NPV of $5,344.93 which is greater than gas with an NPV of $5,844.59. '''''''''''''''''''''''''''''''''''''''''''

Answer 1

1-	Year	Investment A	cumulative cash flow		Investment B	cumulative cash flow
	0	($100)			($100)
	1	58	58		31	31
	2	73	42	amount to be recovered in Year 2	58	89
	3	87			180	11	amount to be recovered in Year 2
	payback period = year before final recovery+(amount to be recovered/cash flow of final year of recovery)	1+(42/73)	1.58		payback period = year before final recovery+(amount to be recovered/cash flow of final year of recovery)	2+(11/180)	2.06
2-	Year	Order 1		Order 2		Order 3
	0	($30,000)		($50,000)		($43,000)
	1	15,000		70,000		34,000
	2	27,000		-19,000		28,000
	MIRR = Using MIRR function in MS excel	19.58%	MIRR = Using MIRR function in MS excel	7.57%	MIRR = Using MIRR function in MS excel	22.04%
	order 1& 3 should be accepted as MIRR is greater than required return of 16%
3-	Year	cash flow	present value of cash flow = cash flow/(1+r)6n r= 10%		Year	cash flow	present value of cash flow = cash flow/(1+r)6n r= 10%
	0	-22000	-22000		0	-17600	-17600
	1	6600	6000		1	5300	4818.182
	2	6600	5454.545		2	5300	4380.165
	3	6600	4958.678		3	5300	3981.968
	4	6600	4507.889		4	5300	3619.971
	5	6600	4098.081		5	5300	3290.883
	6	6600	3725.528		6	5300	2991.712
	NPV	sum of present value of cash inflow	6744.721		NPV	sum of present value of cash inflow	5482.882