Question

16) A project has the following cash flows. What is the internal rate of return?

Year/Cash Flow

0/ -$89,300.00

1/ $82,900.00

2/ $4,200.00

3/ $5,800.00

A) 1.02 percent B) 6.77 percent C) 5.97 percent D) 1.11 percent E) 3.45 percent

17) A company wants to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following four years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine based on its IRR? Why or why not?

A) Yes, because the IRR is 20.55 percent B) Yes, because the IRR is 20.12 percent C) No, because the IRR is 20.19 percent D) No, because the IRR is 29.01 percent E) The answer cannot be determined as there are multiple IRRs

18) Yellow Cup is currently considering a project that will produce cash inflows of $11,000 a year for three years followed by $6,500 in Year 4. The cost of the project is $18,000. What is the profitability index if the discount rate is 9 percent?

A) 1.8 B) 1.7 C) 1.6 D) 1.9 E) 2.0

19) A project has expected cash inflows, starting with Year 1, of $900, $1,200, $1,500, and finally in Year 4, $2,000. The profitability index is 1.5 and the discount rate is 12 percent. What is the initial cost of the project?

A) $2,732.60 B) $2,198.45 C) $1,951.47 D) $2,266.44 E) $1,789.87 Please scroll to the next page

Answer 1

16)	Year	Cashflows ($)	Discounting factor @3.45%	PV of cashflows ($)
	0	-89300	1	-89300
	1	82900	0.966650556	80135.33108
	2	4200	0.934413297	3924.535848
	3	5800	0.903251133	5238.856571
			NPV	0
	We know, IRR is the rate where NPV=0
	By trial and error,
	IRR= 3.45%
	Answer: Option E
17)	Year	Cashflows ($)	Discounting factor @20.5537%	PV of cashflows ($)
	0	-1460000	1	-1460000
	1	223000	0.829505855	184979.8057
	2	600000	0.688079964	412847.9782
	3	600000	0.570766359	342459.8151
	4	600000	0.473454036	284072.4218
	5	600000	0.392732895	235639.7371
			NPV	0
	We know, IRR is the rate where NPV=0
	By trial and error,
	IRR= 20.55%
	As IRR is greater than the minimum required return the project should be accepted.
	Answer: Option A
18)	Year	Cashflows ($)	Discounting factor @9%	PV of cashflows ($)
	0	-18000	1	-18000.00
	1	11000	0.917431193	10091.74
	2	11000	0.841679993	9258.48
	3	11000	0.77218348	8494.02
	4	6500	0.708425211	4604.76
			NPV	14449.01
	Profitability index= (Initial investment+NPV)/Initial investment
			(18000+14449.01)/18000
			1.8
	Answer: Option A
19)	Year	Cashflows ($)	Discounting factor @12%	PV of cashflows ($)
	1	900	0.892857143	803.57
	2	1200	0.797193878	956.63
	3	1500	0.711780248	1067.67
	4	2000	0.635518078	1271.04
			Total	4098.91
	Profitability index= PV of future cashflows/Initial investment
	Initial investment= PV of future cashflows/Profitability index
			4098.91/1.5
			$2,732.60
	Answer: Option A