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Capital Budgeting Exercise Problems

This document contains 4 questions evaluating investment projects by calculating their payback period, net present value, and profitability index given cash flows and cost of capital information. Question 1 evaluates a project with initial cash outlay of $75,000 and cash flows of $25,000 - $8,000 over 5 years with a 13% cost of capital. Question 2 evaluates a project with initial cash outlay of $100,000 and cash flows of $34,432 - $32,219 over 4 years with a 7% cost of capital. Question 3 evaluates a project requiring $700,000 initially and $1 million in year 1, with cash flows of $250,000 - $400,000 over 6 years and

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38 views1 page

Capital Budgeting Exercise Problems

This document contains 4 questions evaluating investment projects by calculating their payback period, net present value, and profitability index given cash flows and cost of capital information. Question 1 evaluates a project with initial cash outlay of $75,000 and cash flows of $25,000 - $8,000 over 5 years with a 13% cost of capital. Question 2 evaluates a project with initial cash outlay of $100,000 and cash flows of $34,432 - $32,219 over 4 years with a 7% cost of capital. Question 3 evaluates a project requiring $700,000 initially and $1 million in year 1, with cash flows of $250,000 - $400,000 over 6 years and

Uploaded by

Usman Ali
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© © All Rights Reserved
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QUESTIONS

Q.1 Fatima Ahmad is evaluating a new project for her firm. She has determined that the after-tax
cash flows for the project will be $25,000; $22,000; $32,000; $19,000; and $8,000, respectively,
for each of the Years 1 through 5. The initial cash outlay will be $75,000. Find Payback period,
net present value and profitability index if the cost of capital is 13% for this project.
Q.2 For an initial cash outflow of $100,000, the Faversham Fish Farm expected to generate net
cash flows of $34,432, $39,530, $39,359, and $32,219 over the next 4 years. Find Payback
period, net present value and profitability index if the cost of capital is 7% for this project.
Q. 3 Briarcliff Stove Company is considering a new product line to supplement its range line. It
is anticipated that the new product line will involve cash investment of $700,000 at time 0 and
$1.0 million in year 1. After-tax cash inflows of $250,000 are expected in year 2, $300,000 in
year 3, $350,000 in year 4, and $400,000 each year thereafter through year 6. Find Payback
period, net present value and profitability index if the cost of capital is 7% for this project.
Q.4 Carbide Chemical Company is considering the replacement of two old machines with a new,
more efficient machine. It has determined that the relevant after-tax incremental operating cash
flows of this replacement proposal are as follows:

Find Payback period, net present value and profitability index if the cost of capital is 7% for this
project.

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