Question

Multiple Choice Question 99

A project with a profitability index of 1.156 also has net cash flows with a present value of $57800. The project’s internal rate of return was 10%. The initial investment was

$50000.

$55000.

$52020.

$66817.

Multiple Choice Question 53

Larkspur Company is considering buying a machine for $460000 with an estimated life of 10 years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $4000 each year. The cash payback period on this investment is

57.50 years.

10.00 years.

9.20 years.

11.50 years.

Multiple Choice Question 57

Swifty Co. purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $(800). Annual cost savings were: $6000 for year 1; 4000 for year 2; and $2000 for year 3. The amount of the initial investment was

Present Value PV of an Annuity
Year of 1 at 12% of 1 at 12%
1 0.893 0.893
2 0.797 1.690
3 0.712 2.402

$10770.

$8808.

$10408.

$9170.

Answer 1

Question 99

Profitability Index = Present Value of cash flows / Initial Investment

1.156 = $57,800 / Initial Investment

Initial Investment = $57800 / 1.156

Initial Investment = $50,000

Question 53

Depreciation = $460000 / 10 Years = $46,000

Net Income = $4,000

Cash Flow = Net Income + Depreciation

                   = $4,000 + $46,000

                   = $50,000

Cash payback period     = Initial Investment / Cash Flow

                                      = $4,60,000 / $50,000

                                      = 9.2 Years

Question 57

Net Present Value = Present Value of cash flow – Initial Investment

- $800 = [ ($6000 x 0.893) + (4000 x 0.797 ) + (2000 x 0.712) ] - Initial Investment

-$800 = $ 9970 - Initial Investment

Initial Investment = $9970 + $800

Initial Investment = $10,770