Question

Information

You will be evaluating three projects for Hasbro Toys. Hasbro's cost of capital or discount rate is 8%.

The first project (A) will cost $200,000 initially. The project will then return cash flows of $50,000 for 5 years.

The second project (B) will cost $250,000 initially. The project will then return cash flows of $115,000 for the next 2 years and $30,000 for 2 years after that.

The third project (C) will cost $100,000 initially. The project will then return cash flows of $39,000 for 3 years.

Question 1

What is Project A's NPV?

Question 2

What is Project A's IRR?

Question 3

What is Project A's Payback Period?

Question 4

What is Project A's PI?

Question 5

What is Project B's NPV?

Question 6

What is Project B's IRR?

Question 7

What is Project B's Payback Period?

Question 8

What is Project B's PI?

Question 9

What is Project C's NPV?

Question 10

What is Project C's IRR?

Question 11

What is Project C's Payback Period?

Question 12

What is Project C's PI?

Question 13

If all three projects are INDEPENDENT, which project(s) would you ACCEPT?

A) Project A

B) Project B

C) Project C

D) Projects A and B

E) Projects A and C

F) Projects B and C

G) Projects A, B, and C

Question 14

If all three projects are MUTUALLY EXCLUSIVE, which project(s) would you ACCEPT?

A) Project A

B) Project B

C) Project C

D) Projects A and B

E) Projects A and C

F) Projects B and C

G) Projects A, B, and C

Answer 1

Question 1
	Project A's NPV		$ -364
Question 2
	Project A's IRR		7.94%
Question 3
	Project A's Payback Period		4 Years
Question 4
	Project A's PI		0.998
Workings:
			Cash flows
		Year	Project A	Project B	Project C
		0	$       -2,00,000	$ -2,50,000	$ -1,00,000
		1	50,000	1,15,000	39,000
		2	50,000	1,15,000	39,000
		3	50,000	30,000	39,000
		4	50,000	30,000
		5	50,000
		Project A
		At 8%					At 5%
		Year	Cash flows	Discount factor	Present Value		Year	Cash flows	Discount factor	Present Value
		1	50,000	0.9259	46,296		1	50,000	0.9524	47,619
		2	50,000	0.8573	42,867		2	50,000	0.9070	45,351
		3	50,000	0.7938	39,692		3	50,000	0.8638	43,192
		4	50,000	0.7350	36,751		4	50,000	0.8227	41,135
		5	50,000	0.6806	34,029		5	50,000	0.7835	39,176
			Total		1,99,636			Total		2,16,474
			Less:Initial cost		-2,00,000			Less:Initial cost		-2,00,000
			Net Present Value		-364			Net Present Value		16,474
		PI	=	Present value of cash inflows /Initial cost
			=	1,99,636	/	2,00,000
			=	0.998
		IRR	=	5%+(8%-5%)*(16474/(16474+364))
			=	7.94%
		IRR is the rate at which NPV is zero.
		Payback period is the time upto which initial cost is recovered back,
		Payback Period		=	Initial cost/Annual cash inflows
				=	200000	/	50000
				=	4.00