Corporate Finance - Corporate Finance Section 1
46. The project has the following annual cash flows:
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 |
| - 85,540 | $42,100 | $23,025 | $30,200 | $16,000 |
With a discount rate of 7%, the discounted payback period (in years) is closest to:
- Option : B
- Explanation :
Year Cash flow Discounted cash flow[ CFn / (1.07)^n ] Cumulative discountedcash flow:[CF0 – Cumulative PVcash flows] 0 -85,540 -85,540 -85,540 1 42,100 39,346 -46,194 2 23,025 20,111 -26,083 3 30,200 24,652 -1,431 4 16,000 12,206 The discounted payback is 3.1 years: [ 3 + (1,431 / 12,206) ].
- Option : A
- Explanation : NPV = -100 + 50/1.15 + 60/(1.15)^2 + 120/(1.15)^3 + 150/(1.15)^4 = 153.51.
Using a financial calculator, enter the cash flows.
CF0 = - 100, CF1 = 50, CF2 = -60, CF3 = 120, CF4 = 150, I = 15, CPT NPV.
NPV = 153.51.
| Year 0 | -£900,000.00 |
| Year 1 | £6,344,400.00 |
| Year 2 | - £8,520,364.00 |
| Year 3 | £2,245,066.00 |
| Year 4 | £650,000.00 |
At which of the following discount rates is the project least likely to be
undertaken?
undertaken?
- Option : C
- Explanation : The question requires that NPV be found at each of the discount rates given as answer choices. When the NPV of cash flows is negative, the project is least likely to be undertaken. Using a financial calculator, first enter the cash flows. CF0 = - 900,000, CF1 = 6,344,400, CF2 = -8,520,364, CF3 = 2,245,066, CF4 = 650,000 Then, determine the NPV for each of the given discount rates When I = 13%, CPT NPV = -3,581 When I = 16%, CPT NPV = +34,600 When I = 18%, CPT NPV = +59,097 Hence, project will least likely be undertaken when the discount rate is 13% as the NPV is negative, while at the other two discount rates it is positive.
49. Given below are the cash flows for a capital project. The required rate of return is 10 percent.
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash flow | (75,000) | 25,000 | 30,000 | 30,000 | 15,000 | 7,500 |
The discounted payback period is:
50. A project has the following annual cash flows:
| Year 0 | Year 1 | Year 2 | Year 3 |
| -450,000 | -1,000,000 | 1,000,000 | 1,000,000 |
What is the IRR of this project?
- Option : C
- Explanation : Enter the following values in a financial calculator: CF0 = -450,000, CF1 = -1,000,000, CF2 = 1,000,000, CF3 = 1,000,000, CPT IRR. IRR = 19.47%.
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