Question 1: Assume you have just been promoted junior financial manager of a company. You are very smart and are planning to be promoted in the next 2-2.5 years. An associate of your company shows you a project with the following cash flows.
|
End of Year
|
Cash Flows
|
|
0
|
-$100,000
|
|
1
|
$40,000
|
|
2
|
$40,000
|
|
3
|
$40,000
|
|
4
|
$40,000
|
|
5
|
-$20,000
|
|
6
|
$80,000
|
a) Compute the payback period of this project.
b) Compute the discounted payback period of this project assuming a discount rate of 5%.
c) Would you accept this project? Explain.
d) Compute the NPV of the project. Is this a good project?
e) Would you use the IRR as evaluation technique for this project? Explain.
Question 2: A project has the following cash flows:
|
End of Year
|
Cash Flows
|
|
0
|
-150,000
|
|
1
|
60,000
|
|
2
|
60,000
|
|
3
|
60,000
|
|
4
|
60,000
|
|
5
|
60,000
|
|
6
|
-50,000
|
|
7
|
-50,000
|
|
8
|
-50,000
|
|
9
|
-50,000
|
|
10
|
-50,000
|
A) Compute the NPV of the project assuming a discount rate of 0%
B) Compute the NPV of the project assuming a discount rate of 8.02%
C) Interpret the results in a) and b)
D)If this project’s risk adjusted discount rate is 6% should the project be accepted? Explain
Question 3: The “golden rule” in capital budgeting is to select a project if the NPV of the project is positive. Would you accept a project with a negative NPV? Explain.