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    CAPITAL BUDGETING TECHNIQUES-TRIAL QUESTIONS - Ns

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    Prince Agyei

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    CAPITAL BUDGETING TECHNIQUES-TRIAL QUESTIONS - Ns

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    Prince Agyei
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    CAPITAL BUDGETING TECHNIQUES-TRIAL QUESTIONS_ns

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    CAPITAL BUDGETING TECHNIQUES-TRIAL QUESTIONS - Ns

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    UNIVERSITY OF GHANA – CITY CAMPUS

    FINC 302: BUSINESS FINANCE


    TRIAL QUESTIONS: INVESNTMENT APPRAISAL TECHNIQUES
    (NET PRESENT VALUE, PAYBACK PERIOD, DISCOUNTED PAYBACK PERIOD, AND INTERNAL RATE OF RETURN)

    1. KASAPREKO Industries is in the process of choosing the better of two equal-risk, mutually
    exclusive capital expenditure projects—M and N. The relevant cash flows for each project
    are shown in the following table. The firm’s cost of capital is 14%. All cash flows in Ghana
    Cedis (GHS).
    Project Project N
    M
    Initial investment (CF0) 28,500 27,000
    Year (t) Cash inflows (CFt)
    1 10,000 10,000
    2 10,000 10,000
    3 10,000 9,000
    4 10,000 8,000
    a) Calculate each project’s payback period.
    b) Calculate each project’s discounted payback period.
    c) Calculate the net present value (NPV) for each project.
    d) Calculate the internal rate of return (IRR) for each project.
    e) Which project do you recommend based on your estimations in (a) to (d)?
    f) Draw the net present value profiles for these projects on the same set of axes and
    explain the circumstances under which a conflict in rankings might exist.

    2. ASOMAFO, Inc., uses a maximum payback period of 6 years and currently must choose
    between two mutually exclusive projects. Project Alpha requires an initial outlay of
    GHS25,000; Project Omega requires an initial outlay of GHS35,000. Using the expected
    cash inflows given for each project in the following table, calculate each project’s payback
    period. Which project meets Elysian’s standards?
    Expected cash inflows
    (GHS)
    Yea Alpha Omega
    r
    1 6,000 7,000
    2 6,000 7,000
    3 8,000 8,000
    4 4,000 5,000
    5 3,500 5,000
    6 2,000 4,000

    Adapted from: Gitman, L. J. and Zutter, C. J. 2012. Principles of Managerial Finance (13th ed.). Printice Hall: Boston (Chapter
    10: Capital Budgeting Techniques).
    3. ABIAKUTA Foods is considering acquisition of a new wrapping machine. The initial
    investment is estimated at GHS1.25 million, and the machine will have a 5-year life with no
    salvage value. Using a 6% discount rate, determine the net present value (NPV) of the
    machine given its expected operating cash inflows shown in the following table. Based on
    the project’s NPV, should ABIAKUTA make this investment?
    Yea Cash inflow
    r
    1 400,000
    2 375,000
    3 300,000
    4 350,000
    5 200,000

    4. Axis Corp. is considering investment in the best of two mutually exclusive projects. Project
    Konkontibaa involves an overhaul of the existing system; it will cost GHS45,000 and
    generate cash inflows of GHS20,000 per year for the next 3 years. Project Aponkyerene
    involves replacement of the existing system; it will cost GHS275,000 and generate cash
    inflows of GHS60,000 per year for 6 years. Using an 8% cost of capital, calculate each
    project’s NPV, and make a recommendation based on your findings.

    5. Billabong Tech uses the internal rate of return (IRR) to select projects. Calculate the IRR for
    each of the following projects and recommend the best project based on this measure. Project
    T-Shirt requires an initial investment of GHS15,000 and generates cash inflows of GHS8,000
    per year for 4 years. Project Shorts requires an initial investment of GHS25,000 and produces
    cash inflows of GHS12,000 per year for 5 years.

    6. REROY Cables is evaluating competing projects. Key data for the two projects under
    consideration are given in the following table. The cost of capital is 8%. All cash flows are in
    Ghana Cedis (GHS).
    Terra Firma
    Initial investment 30,000 25,000
    Year Operating cash inflows
    1 7,000 6,000
    2 10,000 9,000
    3 12,000 9,000
    4 10,000 8,000
    Using these data, calculate for each project the:
    a) Payback period
    b) Discounted payback period
    c) Net Present Value (NPV)
    d) Internal Rate of Return (IRR)

    Adapted from: Gitman, L. J. and Zutter, C. J. 2012. Principles of Managerial Finance (13th ed.). Printice Hall: Boston (Chapter
    10: Capital Budgeting Techniques).
    e) Based on these capital budgeting techniques, advise the company on which project is
    best for shareholders.

    Adapted from: Gitman, L. J. and Zutter, C. J. 2012. Principles of Managerial Finance (13th ed.). Printice Hall: Boston (Chapter
    10: Capital Budgeting Techniques).

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