Fin 515

In: Business and Management

Submitted By amerghaith
Words 603
Pages 3
1. Company A has the opportunity to do any, none, or all of the projects for which the net cash flows per year are shown below. The projects are not mutually exclusive. The company has a cost of capital of 15%. Which should the company do and why? You must use at least two capital budgeting methods. Show your work. Explain your answer thoroughly.
| A | B | C |
0 | -300 | -100 | -300 |
1 | 100 | -100 | 100 |
2 | 100 | 100 | 100 |
3 | 100 | 100 | 100 |
4 | 100 | 100 | 100 |
5 | 100 | 100 | 100 |
6 | 100 | 100 | -100 |
7 | -300 | -200 | 0 |

Ans. Here, we accept project B because its NPV > 0 i.e. $29.35 and IRR>cost of capital. The IRR is 22.90% which is greater than 15%. Rest both the projects has negative NPV.

2. A project requires an initial cash outlay of $40,000 and has expected cash inflows of $12,000 annually for 7 years. The cost of capital is 10%. What is the project’s discounted payback period? Show your work.

Ans. 4.26 years

Year | CF | PV | CFxPV | CCF |
0 | 40000 | 1 | 40000 | 40000 |
1 | 12000 | 0.91 | 10909.09 | 29090.91 |
2 | 12000 | 0.83 | 9917.36 | 19173.55 |
3 | 12000 | 0.75 | 9015.78 | 10157.78 |
4 | 12000 | 0.68 | 8196.16 | 1961.61 |
5 | 12000 | 0.62 | 7451.06 | -5489.44 |
Discounted Payback Period = 4.26 years |

3. A project requires an initial cash outlay of $95,000 and has expected cash inflows of $20,000 annually for 9 years. The cost of capital is 10%. What is the project’s IRR? Show your work.
Ans. IRR = 15.13%

4. A project requires an initial cash outlay of $60,000 and has expected cash inflows of $15,000 annually for 8 years. The cost of capital is 10%. What is the project’s payback period? Show your work.
Ans. Payback period = 4 years

5. A project requires an initial cash outlay of $95,000 and has expected cash inflows of…...

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