Corporate Finance MCQ - 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:

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) ].

47 A project investment of $100 generates after-tax cash flows of $50 in Year 1, $60 in Year 2, $120 in Year 3 and $150 in Year 4. The required rate of return is 15 percent. The net present value is closest to:

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.

48 A project manager is working on a complicated large-scale project for a company that will require multiple investments over time while giving cashinflows in some years over a period of four years. He develops the following cash flow schedule for his project:

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?

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?

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%.