Question

1.   Chloe is considering an investment proposal that requires an initial investment of $88,700, has predicted cash inflows of $28,000 per year for four years and no salvage value.  
At a discount rate of 8 percent the projects net present value is:
a. $ 4,036

b. $15,256

c. $23,300

d. $92,736

2.   The internal rate of return of the investment proposal presented in Question 2 is:
a.   8 percent

b. 10 percent

c. 12 percent

d. Less than 8 percent

3.   The Salt Store is evaluating a capital expenditure proposal with the following predicted cash flows:
Initial investment $(75,000) Operations, each year for four years    25,000 Salvage      8,000
At a discount rate of 10 percent the project’s net present value is:
a. $ 4,250

b. $ 1,214

c. $ 9,714

d. $15,178


4.   The payback period of the investment proposal presented in Question 4 is:

a. 0.123

b. 0.110

c. 0.223

d. 0.250

Answer 1

Solution 1:

Initial investment = $88,700

Annual cash flows = $28,000

Discount rate = 8%

Present value of cash inflows = $28,000 * Cumulative PV Factor at 8% for 4 periods

= $28,000 * 3.312 = $92,736

NPV = Present value of cash inflows - Initital investment = $92,736 - $88,700 = $4,036

Hence option a is correct.

Solution 2:

Let IRR of project is i. Now at IRR, Present value of cash inflows will be equal to initial investment

Lets calculated PV of cash inflows at 10%:

= $28,000 * 3.169 = $88,732

It is nearest to Initial investment of $88,700. Hence IRR of project is 10%

Option b is correct.

Solution 3:

Initial investment = $75,000

Annual cash flows = $25,000

Salvage value = $8,000

Discount rate = 10%

Present value of cash inflows = $25,000 * cumulative PV Factor at 10% for 4 periods + $8,000 * PV factor at 10% for 4th period

= $25,000 * 3.170 + $8,000*0.683 = $84,714

NPV = $84,714 -$75000 = $9,714

Hence option c is correct.

Solution 4:

Computation of cumulative cash Inflows
Year	Cash Inflows	Cumulative Cash inflows
1	$25,000.00	$25,000.00
2	$25,000.00	$50,000.00
3	$25,000.00	$75,000.00
4	$33,000.00	$108,000.00

Payback period = 3 years.