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    Tutorial 4

    Uploaded by

    Mohamed Hamed
    The document contains 7 multiple choice questions regarding capital budgeting techniques like net present value (NPV), internal rate of return (IRR), and profitability index (PI) for evaluating potential investment projects. The questions provide cash flow information for projects and ask students to calculate NPV, IRR, PI, and determine if projects should be accepted based on the required rate of return. The answers are provided as well.

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    Tutorial 4

    Uploaded by

    Mohamed Hamed
    67 views3 pages
    The document contains 7 multiple choice questions regarding capital budgeting techniques like net present value (NPV), internal rate of return (IRR), and profitability index (PI) for evaluating potential investment projects. The questions provide cash flow information for projects and ask students to calculate NPV, IRR, PI, and determine if projects should be accepted based on the required rate of return. The answers are provided as well.

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    The document contains 7 multiple choice questions regarding capital budgeting techniques like net present value (NPV), internal rate of return (IRR), and profitability index (PI) for evaluating potential investment projects. The questions provide cash flow information for projects and ask students to calculate NPV, IRR, PI, and determine if projects should be accepted based on the required rate of return. The answers are provided as well.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    67 views3 pages

    Tutorial 4

    Uploaded by

    Mohamed Hamed
    The document contains 7 multiple choice questions regarding capital budgeting techniques like net present value (NPV), internal rate of return (IRR), and profitability index (PI) for evaluating potential investment projects. The questions provide cash flow information for projects and ask students to calculate NPV, IRR, PI, and determine if projects should be accepted based on the required rate of return. The answers are provided as well.

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    © All Rights Reserved
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    Tutorial 4

    1) DYI Construction Co. is considering a new inventory system that will cost $750,000. The
    system is expected to generate positive cash flows over the next four years in the amounts of
    $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four.
    DYI's required rate of return is 8%. What is the internal rate of return of this project?
    A) 10.87%
    B) 11.57%
    C) 13.68%
    D) 15.13%

    2) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000
    and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs
    $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year
    three, and $45,000 in year four. The firm's required rate of return for these projects is 10%. The
    net present value for Project A is
    A) $12,358.
    B) $16,947.
    C) $19,458.
    D) $26,074.

    3) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000
    and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs
    $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year
    three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%.
    The profitability index for Project A is
    A) 1.27.
    B) 1.22.
    C) 1.17.
    D) 1.12.

    4) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000
    and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs
    $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year
    three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%.
    The internal rate of return for Project A is
    A) 31.43%.
    B) 29.42%.
    C) 25.88%.
    D) 19.45%.

    5)

    Cash Flow in Cash Flow in Cash Flow in Cash Flow in


    Initial Outlay Period 1 Period 2 Period 3 Period 4
    $4,000,000 $1,546,170 $1,546,170 $1,546,170 $1,546,170

    The Internal Rate of Return (to nearest whole percent) is


    A) 10%.
    B) 18%.
    C) 20%.
    D) 24%.

    1 2 3 4 5
    D D A B C

    6) Kingston Corp. is considering a new machine that requires an initial investment of $480,000
    installed, and has a useful life of 8 years. The expected annual after-tax cash flows for the
    machine are $89,000 for each of the 8 years and nothing thereafter.
    a. Calculate the net present value of the machine if the required rate of return is 11 percent.
    b. Calculate the IRR of this project.
    c. Should Kingston accept the project (assume that it is independent and not subject to any
    capital rationing constraint)? Explain your answer.

    Answer:
    a. NPV = ($21,995) From Excel Spreadsheet NPV function with rate = .11, cash flows as given,
    and then subtracting the initial investment of $480,000.
    b. IRR = 9.7%.
    c No, the projects NPV is negative and the IRR is less than the required rate of return.
    Acceptance of this project would reduce shareholder value.

    7) A project that requires an initial investment of $340,000 is expected to have an after-tax cash
    flow of $70,000 per year for the first two years, $90,000 per year for the next two years, and
    $150,000 for the fifth year? Assume the required return for this project is 10%.
    a. What is the NPV of the project%?
    b. What is the IRR of the project?
    d. What is the PI of the project?
    e. What decision would you make regarding this project if the required rate of return is 10%?

    a. NPV = $3,715.34
    b. IRR = 10.38%
    d. PI = 1.011
    e. Accept the project because its NPV is positive, or because its IRR and MIRR are greater than
    the required return of 10%, or because the PI is greater than 1.

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