Quantitative Methods - Quantitative Methods Section 1
- Option : B
- Explanation : Enter the given cash flows in a financial calculator: CF0 = -18 million, CF1 = 5 million, CF2 = 5 million
- Option : A
- Explanation : Enter the given cash flows and discount rate in a financial calculator to calculate NPV: C0= -25,000, CF1= 5000, CF2= 5000, CF3= 5,000, CF4= 15000, i = 5.5%, CPT NPV. NPV = $597.92.
3. The expected cash flows of a project are given below:
| Time | Cash Flow ($) |
| 0 | (180,000) |
| 1 | 100,000 |
| 2 | 200,000 |
| 3 | 250,000 |
Given that the risk-free rate is assumed to be 3 percent, the market risk premium is 6 percent, the beta for the project is 1.2 and the expected inflation is 2 percent, the investment’s net present value (NPV) is closest to:
- Option : C
- Explanation : Opportunity cost of capital for the investment = risk free rate + the market risk premium * beta Opportunity cost = 3% + (6% x 1.2) = 10.2%. The NPV equals the present value (at t = 0) of the future cash flows discounte at the opportunity cost of capital (10.2%) minus the initial investment, or $123,725. Using a financial calculator, solve for NPV. CF0= –180,000, CF1= 100,000, CF2= 200,000, CF3= 250,000, %i = 10.2, CPT NPV = 262,241.84 ≈ 262,000.
- Option : B
- Explanation : Using a financial calculator, compute IRR:CF0 = -5,000,000, CF1 = 3,000,000, CF2 = 3,500,000; CPT IRR = 18.88% ≈ 19%.
5. The table below shows the after-tax cash flows of a project:
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| Cash flow (€) | -50,000 | 35,000 | 25,000 | 10,000 | 2,000 | 2,000 | 3,000 |
The IRR of the project is closest to:
- Option : A
- Explanation : Using a financial calculator, compute IRR: CF0 = –50,000, CF1 = 35,000, CF2 = 25,000, CF3 = 10,000, CF4 = 2,000, CF5 = 2,000, and CF6 = 3,000, CPT IRR. The IRR is 27.05%.
*/?>
*/?>
*/?>
*/?>