Question

Below information is for Question 1 & 2:

You are analyzing a project and have gathered the following data:

Year Cash Flow

o -$175,000

1 $56,000

2 $61,800

3 $72,000

4 $75,000

Required payback period of 2.5 year

Required return 14.5%

1. Based on the net present value of__________, you should_________the project. (please show work).

A. $12,995.84; accept

B. -$15,030.75; reject

C. -$12,995.84; reject

D. $9,283.60; accept

2. Based on the payback period of ______ years for this project, you should______ the project.

A. 2.79; accept

B. 3.79; accept

C. 2.79; reject

D. 3.79; reject

3. Motor City Production sells original automotive art on a prepaid basis as each piece is uniquely designed to the customer's specification. For one project, the cash flows are estimated as follows. Based on the IRR, should this project be accepted if the required return is 9%?

Year Cash Flow

0 $5,500

1 -$5,900

A. Accept the project

B. Reject the project

C. The IRR cannot be used to evaluate this type of project.

D. The firm should be indifferent to either accepting or rejecting this project.

4. Samsung Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and the net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule? (please show the work why? Thank You)

A. Project A only

B. Project B only

C. Both A and B

D. Neither A nor B

5. A project will produce cash inflows of $3,200 a year for years with a final cash inflow of $5,700 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16%?

A. -$311.02

B. $2,168.01

C. $4,650.11

D. $9,188.98

6. You are considering an investment with the following cash flows. If the required rate of return for this investment is 15%, should you accept the investment based solely on the internal rate of return rule? Why or why not?

Year Cash Flow

0 -$152,800

1 96,100

2 102,300

3 -4,900

A. Yes; The IRR exceeds the required return

B. No; The IRR exceeds the required return

C. No; The IRR is less than the required return

D. You cannot apply the IRR rule in this case

Answer 1

1) Net present value= sum of present value of cash flows
=amount in year /((1+rate)^n)
=-175000+(56000/((1+14.5%)^1))+(61800/((1+14.5%)^2))+(72000/((1+14.5%)^))+(75000/((1+14.5%)^4))
=12995.84
since NPV is positive it is adding value and we should accept it
So it is answer A

2) Payback period=2.79
Since the required payback is 2.5 and the calculated is higher than 2.5 years so we should reject it. We will accept if payback period is less than 2.5 years
It is option C

Payback Period = A+(B/C)

In the above formula,

A is the last period with a negative cumulative cash flow;

B is the absolute value of cumulative cash flow at the end of the period A;

C is the total cash flow during the period after A