Question

Question 1

What of the following project is a non-normal cash flow project?

		Project cost (negative CF) is followed by a series of positive cash inflows.
		Project cost (negative CF) is followed by a series of positive cash inflows and a final negative cash flow when closing the project.
		Project cost (negative CF) is followed a negative cash flows and then a series of positive cash inflows.
		Project cost (negative CF) is followed two years’ negative cash flows and then a series of positive cash inflows.

Question 2

What’s the weakness of the discounted payback period?

Provides an indication of a project’s risk and liquidity.

Ignores the time value of money.

Ignores cash flows occurring after the payback period.

Both (B) and (C) correct

Question 3

A firm is considering an investment project with the following cash flows: Year 0 = -$150,000 (initial costs); Year 1= $40,000; Year 2 =$90,000; and Year 3 = $30,000; and Year 4 = $60,000. The company has a 10% cost of capital, calculate the IRR for the project.

		10.0%
		14.2%
		17.2%
		19.7%

Question 4

Two projects are mutually exclusive if the cash flows of one are unaffected by the acceptance of the other, but independent if the cash flows of one can be adversely impacted by the acceptance of the other.

True

False

Answer 1

Question 1

The correct answer is -

Project cost (negative CF) is followed by a series of positive cash inflows and a final negative cash flow when closing the project.

Non - normal cash flow project is one in which the cash flow pattern changes more than once. Cash outflow is denoted as negative outflow and cash inflow is positive outflow. In this project cash outflow (negative) is followed by positive cashflow and then again cash outflow. The cashflow pattern is changing more than one, hence it is non normal cash flow project.

In all other options the series of cash flow is changing once only, hence those are normal cash cash flow projects.

Question 2

Correct answer is-

Ignores cash flows occurring after the payback period.

Payback period is the time period required to cover the initial investment back. After payback period profit start occurring. Discounted payback period takes in to account the time value of money of future cash inflows.

It is disadvantage of using discounted payback period as a technique used for evaluating the capital budgeting decision that it doesnot take into account the cashflows occurring after payback period.

Hope it helps!