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1. (a) You are required to calculate the total present value of inflow at rate of discount of 12% of following data. Year end 1 2 3 Cash inflows $ 2,30,000 2,28,000 2,78,000
4 5 6 18.104.22.168.000 of outflows would be spent as follows: Beginning of year 1 $ 2.50.000 Beginning of year 4 $ 2.00.83.000 Beginning of year 2 $ 2. Work out the internal rates of return of the project given in Self-examination question 1 (a) and (b) Answer to sample questions .000 80.000 Beginning of year 3 $ 2.73. Calculate the total present value of inflows and outflows if the rate of discount is 10% assuming that $ 10.000 2.000 2.000 (Scrap value) (b) Considering the data given in the above.
83.000 0.000 0.797 1.1.636 1.000 0.683 22.214.171.124.60.73.533 6 80. (b) Present value of cash inflows YearsCash inflows Discount factor @ Present value $ 10% $ 1 2.988 5 2.567 1.000 0.120 Total present value 10.000 0.30.73.28.97.000 0.30.000 0.289 5 2.000 0.78.08.118 .54.381 The student should note that the total present value is lower in this case than 10% rate as used earlier.070 2 2.05.751 2.69.09.000 0.000 0.93.712 1.716 3 2.28.936 4 2.826 1.791 6 80.390 2 2. (a) Present value of cash inflows YearsCash inflows Discount factor @ Present value $ 12% $ 1 2.000 0.564 45.000 0.909 2.507 40.560 Total present value 9.78.621 1.328 3 2.893 2.778 4 2.88.14.
21.250 2 2.000 0.500 It may be noted that the year-end of first year and beginning of year two are the same.50.06.50. The total present value of outflows would therefore be $ 6.118. at 10% it is $ 10.000 0.71. If we increase the rate to 15% the results would be as follows. Hence the internal rate of return would be 9.751 1.23.826 2.500 3 2.500.026.50.14.909 2.14.000 0.000 spent at the beginning of year one since the money is immediately spent.21.500 and that of inflows is $ 10. (b) In this case the sum of the discounted values of outflows at 10% is $ 8.50.50. 2.500 + $ 2.71.e.87.62%.000. $ 8. (a) At 8% rate of discount the total present value is $ 1.Present value of cash outflows YearsCash inflows Discount factor @ Present value $ 10% $ 1 2. Outflows . i. There is no need to discount the sum of $ 126.96.36.1990 6.
87.368 3 2.500 2 2.50.500 8.000 1.35.658 1.000 1.61.750 .681 6 80.756 1.00.000 0.72.924 4 2.000 188.8.131.52.184.108.40.206.000 1 2.50.73.000 0.876 5 2.000 Inflows Years Cash inflows Discount factor @ Present value end $ 15% $ 1 2.17.000 0.21.000 0.847 2.000 0.000 0.432 34.000 3 2.50.509 Since the difference between the discounted outflows and inflows is still there we shall have to use a higher rate say 18%.89.50.497 1.000 0.560 8.000 0.000 2.870 2.Years Cash inflows Discount factor @ Present value end $ 15% $ 0 2.000 0.28.658 1.82.572 1.11.756 1. Outflows Years Cash inflows Discount factor @ Present value end $ 15% $ 0 2.000 0.78.000 1 2.870 2.100 2 2.
83.Is it possible for a project to have a payback period of 2 years and yet have a negative net present value? Explain.78.19.000 0.516 1.What is the decision-criteria for the profitability index? Does this criteria agree with that of the net present value technique? . Capital Budgeting Techniques Practice Questions 1.28. 220.127.116.11.52.437 1.30.000 0.609 1.745 The internal rate of return is approximately 19%.73.028 5 2.847 1.250 7.22.718 1.704 3 2.46.718 0.302 4 18.104.22.1680 8.000 2.000 0.609 1.301 6 80.000 0.000 0.000 0.79.810 2 2.500 Inflows Years Cash inflows Discount factor @ Present value end $ 18% $ 1 2.000 0.2 3 2.370 29.63.500 1.
What is this project's internal rate of return? .Is it possible for a project's IRR to be less than its MIRR? Explain. and yet have a positive net present value? Explain. according to the discounted payback period method. what is the project's net present value? b.Is it possible for a project to not pay back.00 0 +50.000 +50.3.000 + $200. what is the project's net present value? c. 4. Capital Budgeting Practice Problems 1.If the discount rate is 5%.If the discount rate is 0%.00 0 a.Consider the project with the following expected cash flows: Yea Cash r flow 0 1 2 3 $200.
Consider a project with the expected cash flows: Yea Cash r flow 0 1 2 $50.If the reinvestment rate is 5%.0 00 $100.If the discount rate is 5%.00 0 +100. what is this project's net present value? 3.What is this project's internal rate of return? b.d.000 +50.A project requiring a $1 million investment has a profitability index of 0.00 0 3 a. what is this project's modified internal rate of return? 2.96. What is its net present value? Solutions Problem set-Multiple Choice Questions on Capital Budgeting .
4. c. Project A which has a payback period of 2. Project B which has a net present value of $3. Project B which has a payback period of 2.0 years. b.000 3.25 years. Which method provides more confidence. Project A which has a net present value of $11.011. which of the two projects should be chosen? a.000 $5. 5. Project B which has a payback period of 2.031. . Project A which has a net present value of $1.000 3.0 years.000 2 4. b. Project A which has a payback period of 2. d. Choose only the best investments.011. assuming a cost of capital of 10%. Project B which has a net present value of $13. c. Selection of one investment precludes the selection of an alternative.000 3 3.000. There are no investment options available.25 years. ABC Company is considering two investments both of which cost $10. Based on the net present value method. The term mutually exclusive investments mean: a.2. c. The elite investment opportunities will get chosen. b.000 8. The cash flows are as follows: Year Project A Project B 1 $6. d. Payback because it provides a good timetable. Based on the payback method. which of the two projects should be chosen? a. the payback method or the net present value method? a.031 d.
is considering the purchase of a new machine that would increase the speed of bottling and save money. $13. $15.000 4 10. About 23% d.000 3 25.883 b. $17.b. assuming cost of capital of 10%? a. Net present value because it does not need to use cost of capital.883 c. Net present value because it considers all inflows and outflows and the time value of money. Year Cash Flow 1 $15. The Pan American Bottling Co. The annual cash flows have the following projections. d. What is the internal rate of return? a. The net cost of this machine is $45. About 27% . About 10% c. c.883 7. What is the net present value of selecting the new machine.000.000 6.000 5 5.883 d. $11. Payback because it tells you when you break even.000 2 20. About 7% b.
NPV is positive and IRR is less than cost of capital.000 for project H and $5.000 investment) Project H ($20. No. No. $28.000 Year Cash Flow 1 $16.000 for project E c. b.000 2 5. What is the NPV of both projects using zero discount rate? a.000 for project E and $5. $20.000 2 6. d.8.000 for project H b. $8. Big Sky Construction Company is considering two new investments. c. NPV is positive and IRR exceeds cost of capital.000 for project E and $25. Yes. The investment and cash flow patterns are as follows: Project E ($20. $8.000 3 4. Project E calls for the purchase of earth-moving equipment. Big Sky wishes to use a new present value profile in comparing the projects.000 4 10. Yes.000 for both projects.000 9.000 for project H d. . Project H represents the investment in a hydraulic lift.000 3 7. IRR is higher than the cost of capital. NPV does not provide enough information.000 investment) Year Cash Flow 1 $ 5. Should Pan American buy the machine? a.
About 13% c. Both d. False .000 for project E and $5. assuming cost of capital of 18%. $22.000 for both projects.970 for project H d. What is the NPV of both projects using 9% discount rate? a. which project would you accept using NPV. Neither 13. c. About 9% b.121 for project E and $21. Higher d. $20. a.10. Project E b. $8. Risk-averse managers will generally require _____ return from risky investments. The IRR of project E is _______ a. a. a.970 for project H b. About 16% d. Lower b. About 20% 12. Zero c. The concept of risk can be incorporated into the capital budgeting process by using higher discount rates for riskier investments. $2. True b. Project H c. Negative 14.121 for project E and $1.000 for project H 11. If the two projects are mutually exclusive.
If risk is to be analyzed in a qualitative way.10 Moderate response 40 . 5. which is the least risky? a. 45 d. New market c. 60 17. Possible Market Reaction Sales in Units Probabilities Low response 20 . New equipment b. New product in a foreign market Best Technology Corp. 30 c. What is the standard deviation of unit sales? a. 20 b.15.8 . 160 c. The possible levels of unit sales and the probabilities of their occurrence are given.20 High response 65 .40 Very high response 80 .30 16. Repair of old machinery d. 370 b. 19. is evaluating the introduction of a new product. What is the expected value of unit sales for new product? a.2 d.
000 and a standard deviation of $750. c. while company 2 has a negative correlation. which has a lower risk? a. A company is considering the purchase one of two companies. Project A has an expected return of $1. Project B. Company 1 because it increases return c. because coefficient of variation is lower. Using coefficient of variation. because coefficient of variation is higher. Which company should the acquiring company purchase if it must purchase one of them? a. b. Company 2 because it increases return Cash Budgets Page 2: Solution and Question The Cash Budget Solution Pictures . Project A. a. A company with a beta of 1.000 and a standard deviation of $590. Project B has expected return of $3.18. d. True b. Project B. because coefficient of variation is lower. False 20. 19. Project A. Company 1 has a positive correlation of returns with the acquiring company. Company 2 because it reduces risk d. Company 1 because it reduces risk b. because coefficient of variation is higher.50 is considered to have lower level of risk than the stock market in general. Both of these companies have an expected return of 15% with the same standard deviation of returns.
500 38.000 . Do your best and use the forms and pictures from page 1 to help you.000 22. the sales plans and debtors details are as follows: Credit Sales MonthMonth Month 3 1 2 42.000 36. The opening balance of cash is to be £5.000 44.000 (that's the balance b/d for Month 1).Here's a question that is remarkably like the exercise you've just worked through on Cash Budgets Page 1.000 MonthMonth Month 6 4 5 45. For this business.
750 38.000 The business has three classes of creditor: Creditors 1. the purchase plans and creditors details are as follows: Payment History for Creditors Month 1Month 2 Month 3 29.000 20.500 Month 4Month 5 Month 6 22. 2 and 3 and we pay our debts according to this table Payment History for Creditors Which When We Pay How We Creditors Pay at This Time Creditors 1 within the month of sale 75% Creditors 2 in the month after sale 20% Creditors 3 in the second month after sale 5% .000 26.000 31.The business has three classes of debtor: Debtors 1. 2 and 3 and they pay their debts according to this table Payment History of Debtors Which When They Pay How Many of Debtors Them Pay at This Time Debtors 1 within the month of sale 60% Debtors 2 in the month after sale 30% Debtors 3 in the second month after sale 10% For this business.
113. . the Total Receipts from Debtors for Month 6 is £42.350. and the Total Payments to Creditors for Month 6 is £28.Final words from me are that the balance c/d of the cash budget at the end of Month 3 is £5.350.
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