Corporate Finance - Corporate Finance Section 1
- Option :
- Explanation :
Year 0 1 2 3 4 5 6 Cash flow (500) 110 110 110 110 110 110 umulative cash
flow
(500) (390) (280) (170) (60) 50 160 The payback is between 4 and 5 years. The payback period is 4 years plus
60/110 = 0.55 of the fifth year cash flow, or 4.55 years.Year 0 1 2 3 4 5 6 Cash flow (500) 110 110 110 110 110 110 Discounted cash flow (500) 101.85 94.31 87.32 80.85 74.86 69.32 Cumulative DCF (500) (398.15) (303.84) (216.52) (135.67) (60.81) (8.51) The discounted payback is between 5 and 6 years. The discounted payback period is 5 years plus 60.81/69.32 = 0.88 of the sixth year cash flow, or 5.88 years.
- Option : B
- Explanation : The present value of future cash flows is PV = 2,000/0.08 = 25,000. The profitability index is PI = PV / Investment = 25,000 / 15,000 = 1.67.
- Option : C
- Explanation : Using the calculator: CF0 = - 400, C01 = 100, F01 = 4, C02 = 150, F02 = 1, I = 7.5, CPT NPV. NPV = 39.41. PI = 1 + (39.41/400) = 1.098 = 1.1 approx.
- Option : B
- Explanation : For a project with normal cash flows, the NPV profile intersects the horizontal axis at the point where the discount rate is equal to the IRR. The crossover rate is the discount rate at which the NPVs of the projects are equal. While it is possible that the crossover rate is equal to each project’s IRR, it is not a likely event. The IRR for both projects being the firm’s WACC will only arise when both projects have a NPV = 0.
| NPV | IRR | |
| A | €7 million | 8.6% |
| B | €9 million | 8.6% |
| C | €11 million | 5.9% |
- Option : B
- Explanation : Enter the following values in a financial calculator to determine NPV and IRR. CF0 = -500, C01 = 110, F01 = 6, I = 8, CPT NPV. NPV = 8.52 million euro. CPT IRR. IRR = 8.56 per cent.
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