Question

firm is considering a project with the following expected cash flows:
Year Cash Flow
0 -P350 million
1 100 million
2 185 million
3 112.5 million
4 350 million
The project’s WACC is 10 percent. What is the project’s discounted payback?
a. 3.15 years
b. 4.09 years
c. 1.62 years
d. 3.09 years

The lolo Corporation has been presented with an investment opportunity that will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10.
This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10 percent. What is the NPV for this investment?
a. $135,984
b. $ 18,023
c. $219,045
d. $ 51,138

an investment project requires an initial investment of P100,000. The project is expected to generate net cash inflows of P28,000 per year for the next five years. Assuming a 15% discount rate, the project's Payback Period is:

A) 0.28 years

B) 3.36 years

C) 3.57 years

D) 1.40 years

EURUS operates a part time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of $1,500 in Year 1, $2,100 in Year 2, and $3,200 in Year 3. If EURUS required rate of return is 10%, then the most he would be willing to pay for the new computer system would be:

A) $4,599

B) $5,501

C) $5,638

D) $5,107

BABAEROPEROLOYAL Corporation is considering a project that would require an investment of P80,000. No other cash outflows would be involved. The present value of the cash inflows would be P60,000. The profitability index of the project is closest to:

A) 1.33

B) 0.75

C) 20,000

D) -0.25

Answer 1

Calculation of discounted Payback period

Correct Option is= (d) 3.09 years

First calculate discounted cash flow and cumulative discounted cash flow

Year	Cash Flow	Present Value Factor @10%	Discounted Cash Flow	Cumulative Cash Flow
0	-350	1	-350	-350
1	100	0.909	90.91	-259.09
2	185	0.826	152.89	-106.20
3	112.5	0.751	84.52	-21.68
4	350	0.683	239.05	217.38

Then apply this formula

Discounted payback Period= A+ B/C

Where,
A = Last period with a negative discounted cumulative cash flow;
B = Absolute value of discounted cumulative cash flow at the end of the period A; and
C = Discounted cash flow during the period after A.

so,

=3+21.68/239.05

=3.09 years

Calculation of NPV for lolo Corporation

Correct Option is= (d) $51138

First Calculate Discounted Cash flow at the rate of 10%

Present Value Factor formula= 1/(1+r)^n.... which is to be calculated for each year

NPV=Sum of Discounted Cash Flow- Initial Investment

Year	Cash Flow	Present Value Factor @10%	Discounted Cash Flow
0	-150000	1	-150000
1	30000	0.909	27272.73
2	30000	0.826	24793.39
3	30000	0.751	22539.44
4	30000	0.683	20490.40
5	35000	0.621	21732.25
6	35000	0.564	19756.59
7	35000	0.513	17960.53
8	35000	0.467	16327.76
9	35000	0.424	14843.42
10	40000	0.386	15421.73
NPV	51138.24

Calculation of Payback Period for Investment Project

Correct Option is (c) 3.57 years

In the Current case interst rate is not taken into account as it is payback period not discounted payback period. Rest calculation is same as given in 1st answer.

Year	Cash Flow	Cumulative Cash Flow
0	-100000	-100000
1	28000	-72000
2	28000	-44000
3	28000	-16000
4	28000	12000
5	28000	40000

apply this formula

Discounted payback Period= A+ B/C

Where,
A = Last period with a negative cumulative cash flow;
B = Absolute value of cumulative cash flow at the end of the period A; and
C = cash flow during the period after A.

so,

=3+16000/28000

=3.57 years

Amount that EURUS will be willing to Pay

Correct Option is Option (b) $5501

It will be equal to present value of cash flow expected from the computer system i.e

Year	Cash Flow	Present Value Factor @10%	Discounted Cash Flow
1	1500	0.909091	1363.64
2	2100	0.826446	1735.54
3	3200	0.751315	2404.21
Total	5503.38

Since exact amount is not given in option, amount nearest to that has been chosen.

Calculation of Profitability Index

Correct Option Is= (B) i.e 0.75

Profitabilty Index Formula=Present Value of Future Cash Flows/Investment Value

=60000/80000

=0.75