Question

Use the information in the table below for the following 5 questions.

A capital investment project is estimated to have the following after-tax cash flows, by year:

0	1	2	3	4
-$50,000	$15,000	$17,500	$17,500	$25,000

The company utilizes a discount rate of 20% to evaluate capital projects. You may have rounding errors in your calculations so choose the closest answer. Assume cash flows are received equally over the year.

The NET PRESENT VALUE for the project shown above is:

Select one:

a. -$4,789

b. -$3,163

c. $0

d. -$10,958

e. -$5,672

Question 8:

Use the information in the table below for the following 5 questions.

A capital investment project is estimated to have the following after-tax cash flows, by year:

0	1	2	3	4
-$50,000	$15,000	$17,500	$17,500	$25,000

The company utilizes a discount rate of 20% to evaluate capital projects. You may have rounding errors in your calculations so choose the closest answer. Assume cash flows are received equally over the year.

The INTERNAL RATE OF RETURN for the project shown above is:

Select one:

a. 15.41%

b. 14.27%

c. No IRR

d. 3.92%

e. 16.88%

Question 9:

Use the information in the table below for the following 5 questions.

A capital investment project is estimated to have the following after-tax cash flows, by year:

0	1	2	3	4
-$50,000	$15,000	$17,500	$17,500	$25,000

The company utilizes a discount rate of 20% to evaluate capital projects. You may have rounding errors in your calculations so choose the closest answer. Assume cash flows are received equally over the year.

The PROFITABILITY INDEX for the project shown above is:

Select one:

a. 0.93

b. 0.78

c. 1.60

d. 0.89

e. 2.15

Question 10:

Use the information in the table below for the following 5 questions.

A capital investment project is estimated to have the following after-tax cash flows, by year:

0	1	2	3	4
-$50,000	$15,000	$17,500	$17,500	$25,000

The company utilizes a discount rate of 20% to evaluate capital projects. You may have rounding errors in your calculations so choose the closest answer. Assume cash flows are received equally over the year.

The PAYBACK for the project shown above is:

Select one:

a. 2.16 years.

b. 3.15 years.

c. 3.00 years.

d. Does not pay back.

e. 3.66 years.

Question 11:

Use the information in the table below for the following 5 questions.

A capital investment project is estimated to have the following after-tax cash flows, by year:

0	1	2	3	4
-$50,000	$15,000	$17,500	$17,500	$25,000

The company utilizes a discount rate of 20% to evaluate capital projects. You may have rounding errors in your calculations so choose the closest answer. Assume cash flows are received equally over the year.

The DISCOUNTED PAYBACK for the project shown above is:

Select one:

a. 4.86 years.

b. 3.96 years.

c. Does not pay back.

d. 2.27 years.

e. 3.66 years.

Answer 1

		For payback period	For NPV	For discounted payback period	For IRR
Year	Cashflow ($)	Cumulative cashflows	Discounting factor @ 20%	PV of casflows	Discounting factor @ 20%	PV of casflows	Cumulative discounted cashflows	Discounting factor @ 16.88%	PV of cashflows
0	-50000	-50000	1	-50000.00	1	-50000.00	-50000.00	1	-50000
1	15000	-35000	0.833333333	12500.00	0.833333333	12500.00	-37500.00	0.855578371	12833.67556
2	17500	-17500	0.694444444	12152.78	0.694444444	12152.78	-25347.22	0.732014349	12810.25111
3	17500	0	0.578703704	10127.31	0.578703704	10127.31	-15219.91	0.626295644	10960.17377
4	25000	25000	0.482253086	12056.33	0.482253086	12056.33	-3163.58	0.535845007	13396.12517
			NPV	-3163.58					0
NPV of the project= Present value of future cashflows discounted at the required rate of return.
NPV= $-3163.58 (See table)
Answer: Option B
We know, IRR of the project is the rate where NPV of the project is zero. By trial and error we guessed the project IRR to be 16.88%
IRR= 16.88% (See table)
Answer: Option E
Profitability index= (NPV+Initial investment)/Initial investment
		(-3163.58+50000)/50000
		0.94
Nearest to= 0.93
Answer: Option A
Payback period= A+ (B/C)
where,
A= last period number with negative cumulative cashflows
B= absolute value of cumulative net cashflow at the end of period A
C= total cash inflow during the period following period A
As the cumulative cashflow in year 3 is equal to zero
Therefore, payback= 3 years
Answer: Option C
Discounted Payback period= A+ (B/C)
where,
A= last period number with negative discounted cumulative cashflows
B= absolute value of discounted cumulative net cashflow at the end of period A
C= total discounted cash inflow during the period following period A
As the cumulative cashflow are negative throughout the life of the project so the project doesnot payback
Answer: Option C