Question

Q1) A project requires an initial investment of $5,000. It is expected that the project will last 3 years and generate net cash flows of $3,500 for each of these years. If the discount rate for the project is 10%, the discounted payback period for the project.is:

Select one:

a. 1.63 years

b. 2.55 years

c. 1 year

d. More than 3 years

Q2) Capital rationing refers to the limiting of capital resources to under-performing divisions.

Select one:

True

False

Q3) A new project will generate annual revenue of $370,000 and will entail operating expenses of $150,000. The annual depreciation and amortisation for the assets used in the project will equal $50,000. An annual capital expenditure of $20,000 will be required to offset wear and tear on the assets used in the project but no additions to working capital will be required. The company tax rate will be 25 percent. What is the incremental annual free cash flow for the project?

Select one:

a. $150,500

b. $149,500

c. $157,500

d. None of the provided choices

Q4) RXP Ltd is a producer of tablet computers, and has already five different models selling in the market. The company is now considering a project that involves the launch of a new tablet computer model. The company's market analysts predict that the new model will be sold at a rate of 10,000 units per year and at a price of $500 per unit. However, the analysts further predict that the launch will decrease the sales revenue from existing models by about $1m per year. Given the scenario, please state whether the following statement is True or False:

While evaluating the project, the company should consider the decrease of sales revenue from existing models.

Select one:

True

False

Answer 1

Dear student, only one question is allowed at a time. I am answering the first question

1)

Discounted Payback period for uneven cash flows :

Payback Period =	A +	B
		C

Where,
A is the last period number with a negative cumulative discounted cash flow;
B is the absolute value (i.e. value without negative sign) of cumulative net discounted cash flow at the end of the period A; and
C is the total discounted cash inflow during the period following period A

The following table shows the calculations :

PV Factor

= 1 / ( 1 + Rate of Interest ) ^ Number of years

So, PV Factor for year 2 will be

= 1 / ( 1.10 ) ^ 2

= 1 / 1.21

= 0.826446

Calculations	A	B	C = A x B	D = Cumulative C
Year	Cash Flow	Discounting Factor	Discounted Cash Flow	Cumulative Discounted Cash Flow
0	-5000	1	-5000	-5000
1	3500	0.909090909	3181.81818	-1818.18182
2	3500	0.826446281	2892.56198	1074.380165
3	3500	0.751314801	2629.6018	3703.981968

So, Payback period

= 1 + |-1,818.18| / 2,892.56

= 1 + 0.63

= 1.63 Years

So, as per above calculations, option a is the correct option