Question

A project has the following cash flow's what is the payback period in years?

A 2.48

B 2.74

C 2.80

D 3.63

E 3.11

Bingo Bowling is considering a project with an initial cost of $161,400 the project will not produce any cash flows for the first 3 years starting in year 4 the project will produce cash inflows of $94,000 a year for the next 5 years the project is risky so the firm has assigned it a discount rate of 13.5% what is the projects IRR?

A 18.8%

B 20.17%

C 21.37%

D 22.53%

E 14.77%

Philly Has a beta of 1.14 and an expected return of 10.6% Brillo has an expected return of 8.3% the risk-free rate is 4.4% what is the beta of Brillo?

A 1.23

B .704

C .717

D .869

E .918

no cahflows needed

Answer 1

As the cashflows are not given for the first question, it cannot be solved. Payback period is the period by which our initial investment is recovered. We do not use discounted cash flows. For example, if our initial investment was $200 and we get cash inflows of 50,50 & 100 in years 1,2,& 3 respectively, then our payback period would be 3 years. The cash flows after the payback period is not taken into any consideration. So, we will just keep adding cash flows from the beginning and stop wherever we get the sum to be equal to initial investment. Generally, we can assume that cashflows are evenly spread throughout the year.

For the second question, we can use excel's =irr function. We can also solve the following equation and take the use of options to feed and check in the equation. IRR is that rate of internal return which makes npv = 0. The initial outlay is -$161400. From year 4 we get $94000 cash inflows for 5 years. We will discount the future cash flows to get its present value.

Thus, -161400 + 94000/(1+irr)^4 + 94000/(1+irr)^5 + 94000/(1+irr)^6 + 94000/(1+irr)^7 + 94000/(1+irr)^8 = 0

In excel =irr(-161400,0,0,94000,94000,94000,94000,94000) = 20.17%

Thus the correct option is B.

Now, the third question says that,

Beta (Philly) = 1.14

Expected return (Philly) = 10.6%

Expected return (Brillo) = 8.3%

Risk free rate, Rf = 4.4%

According to Capital Asset Pricing Model, CAPM, we have, Re = Rf + Beta(Rm-Rf),

Where Re is the expected return on stock Beta is the beta of security and Rm is the return of market, Rf is risk free rate

Putting this equation with values of Philly, we get,

10.6 = 4.4 + 1.14* (Rm-4.4)

Rm = 9.839%

Now, using this same equation for Brillo, we get

8.3 = 4.4+Beta*(9.839-4.4)

Thus, Beta (Brillo) = 0.717

Thus the correct option is C