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Week 4

1. The Delta company is planning to purchase a machine known as machine X. Machine X


would cost $25,000 and would have a useful life of 10 years with zero salvage value. The
expected annual cash inflow of the machine is $10,000. Compute payback period of machine X
and conclude whether or not the machine would be purchased if the maximum desired payback
period of Delta company is 3 years.

a. 3 years
b. 2.5 years
c. 2 years
d. 3.5 years

Solution:

Step 1: In order to compute the payback period of the equipment, we need to workout the
net annual cash inflow by deducting the total of cash outflow from the total of cash inflow
associated with the equipment.
Computation of net annual cash inflow:
$75,000 – ($45,000 + $13,500 + $1,500)
= $15,000
Step 2: Now, the amount of investment required to purchase the equipment would be
divided by the amount of net annual cash inflow (computed in step 1) to find the payback
period of the equipment.
= $37,500/$15,000 =2.5 years
Depreciation is a non-cash expense and has therefore been ignored while calculating the
payback period of the project.
According to payback method, the equipment should be purchased because the payback
period of the equipment is 2.5 years which is shorter than the maximum desired payback
period of 4 years.

2. Choose the odd one?


a. NPV
b. Profitability Index
c. IRR
d. ARR
3. Discounting techniques takes _______________ into account?
a. Inflation
b. Time value of money
c. Discount received
d. Profit
4. ___________________________ is the expected returns per unit of period over the life of the project
or investment?

a. Discount Factor
b. Inflation Factor
c. Return Factor
d. Revenue Factor

5. Calculate the net present value of a project which requires an initial investment of $243,000 and it
is expected to generate a cash inflow of $50,000 each month for 12 months. Assume that the
salvage value of the project is zero. The target rate of return is 12% per annum?

a. $ 391754
b. $ 301000
c. $ 197543
d. $ 319754
Solution:
We have,
Initial Investment = $243,000
Net Cash Inflow per Period = $50,000
Number of Periods = 12
Discount Rate per Period = 12% ÷ 12 = 1%
Net Present Value
= $50,000 × (1 − (1 + 1%)^-12) ÷ 1% − $243,000
= $50,000 × (1 − 1.01^-12) ÷ 0.01 − $243,000
≈ $50,000 × (1 − 0.887449) ÷ 0.01 − $243,000
≈ $50,000 × 0.112551 ÷ 0.01 − $243,000
≈ $50,000 × 11.2551 − $243,000
≈ $562,754 − $243,000
≈ $319,754

6. ______________________________ is the discounting rate which delivers a Net Present Value equal
to zero?

a. ARR
b. IRR
c. NPV
d. Profitability Index

7. Who are the owners of a company?

a. Creditors
b. Equity Shareholders
c. Managers
d. Debenture holders

8. The amount of capital that a company can potentially issue, as per its memorandum, represents the?
a. Issued Capital
b. Paid-up Capital
c. Authorized Capital
d. Subscribed Capital

9. _______________ are bonds issued outside India but denominated in Indian Rupees, rather than the
local currency?

a. Euro bonds
b. Masala bonds
c. Samurai bonds
d. Redeemable bond

10. The first public offering of equity shares of a company , which is followed by a listing of its shares on
the stock market is called?

a. IPO
b. BPO
c. IOP
d. EPO