Name: JOJIE A.

DADOR Course & Year: BSBA 3rd year

Subject: ELECTIVE 1: Treasury Management Assignment 1
True and false:
1. Projects with positive NPV are accepted while those with negative NPV are rejected.
Ans: True
2. The project with a higher NPV is prioritized.
Ans: True
3. Payback Period refers to the number of years/months the firm can recover its
investment.
Ans: True
4. The shorter the payback period, the better it is.
Ans: True
5. IRR refers to the interest factor that gives the lowest positive NPV.
Ans: True

Problems:
1. Shown below are the annual cash inflows of Firm A and Firm B. Calculate their payback
period. Which firm has a better payback period and why?

Investment Year Firm A Firm B

150,000 150,000
Cash Inflows
1 30,000 = 5 70,000 = 2.14
2 40,000 = 3.75 60,000 = 2.5
3 50,000 = 3 50,000 = 3
4 60,000 = 2.5 40,000 = 3.75
5 70,000 = 2.14 30,000 = 5

Answer:
Firm A
150,000: Cash inflow
120,000 – cash inflows for 3 years
+30,000 / 60,000 x 360 = 72 days
PBP = 3 years and 180 days

Firm B
130,000 – cash inflows for 2 years
 +20,000 / 50,000 x 360 = 168 days

PBP = 2 years and 144 days

The firm may prioritize the project proposal Firm B because in has a lower payback period

2. Kenneth’s project proposal involves an initial investment of P500,000 and annual cash inflows of
120,000 a year for the next 7 years. If the firm has a maximum payback period of 4 years, should
management accept Kenneth’s proposal? Justify.

Answer:
Initial investment: 500,000
Cash inflows: 120,000
Period: 7years and 4 years

120,000 x 7 = 840,000 / 7 = 120,000 (average annual cash inflow)

120,000 x 4 = 480,000 / 4 = 120,000 “ “ “

500,000 / 120,000 = 4.57 payback period

The management accept Kenneth’s proposal because the average annual cash inflow of 4 and 7
days are equal its better to take the proposal its greater return and nearest to target to the firm
payback period of 4years.

3. If a capital expenditure requires an initial investment of 50,000 and will yield annual cash inflows
of 15,000 per year for 5 years. Calculate for the NPV assuming that the costs of capital are as
follows: 8%, 10%, 12%. What cost of capital will yield an acceptable NPV? Explain your answer.

Answer:
Investment: 50,000
Cash inflows: 15,000
Cost of capital: 8%,10%,12%

15,000 x 3.993 = 59,895 – 50,000 = 9,895(Net present Value)

15,000 x 3.791 = 56,865 – 50,000 = 6,865 “
15,000 x 3.605 = 54,075 – 50,000 = 4,075 “
 Since the cost of capital of 8% is greater NPV of 9,895 its highly accepted the project

4. Which of the following 10-year projects will give an acceptable NPV assuming cost of capital is
12%.
Initial Investment of 20,000 & Annual cash inflows of 6,000
Initial Investment of 30,000 & Annual cash inflows of 7,000
Initial Investment of 40,000 & Annual cash inflows of 9,000

6,000 x 5.65 = 33,900 – 20,000 = 13,900

7,000 x 5.65 = 39,550 – 30,000 = 9,550
9,000 x 5.65 = 50,850 – 40,000 = 10,850

The acceptable NPV of 13,900 in Initial investment of 20,000 & annual cash inflows of
6,000 because of greater the NPV

5. Calculate the IRR for each of the projects shown below:

Project Project Y Project Z

Initial Investment 40,000 70,000 100,000

Year CASH IN FLOWS

1 15,000 25,000 27,000

2 15,000 25,000 30,000
3 15,000 25,000 35,000
4 15,000 25,000 42,000
5 15,000 25,000 51,000

Project

Year 1 2 3 4 5
Initial Outlay -40,000
After-Tax Cash Flow 15,000 15,000 15,000 15,000 15,000
25% - IRR
Project Y

initial Outlay -70,000.00

after-Tax Cash flow 25,000. 25,000. 25,000 25,000 25,000
23% - IRR
Project Z
initial Outlay (100,000.00)
after-Tax Cash flow 27,000.00 30,000.00 35,000.00 42,000.00
51,000.00
 22% - IRR

Project 1 15,000 15,000 15,000 15,000 15,000

12,000 9,600 7,680 6,144 4,915 = 40,339.20 = 339.20 NPV

Project Y 25,000 25,000 25,000 25,000 25,000

20,325.20 16,524.56 13,434.60 10,922.44 8,880.03 = 70,086.82 = 86.82 NPV

Project Z 27,000 30,000 35,000 42,000 51,000

22,131.15 20,155.87 19,274.74 18,958.76 18,869.96 = 99,390.48 = (609.52) NPV