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Bf208 Assignment 1

This document contains a 10 question multiple choice test on capital budgeting concepts like NPV, IRR, payback period and other project evaluation techniques. It provides relevant cash flow and project information for each question. It also includes a second section with a multi-part question requiring calculation of metrics like NPV, IRR, payback period and profitability index for a new machine replacement project given detailed financial information.

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Emmanuel Neshiri
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123 views3 pages

Bf208 Assignment 1

This document contains a 10 question multiple choice test on capital budgeting concepts like NPV, IRR, payback period and other project evaluation techniques. It provides relevant cash flow and project information for each question. It also includes a second section with a multi-part question requiring calculation of metrics like NPV, IRR, payback period and profitability index for a new machine replacement project given detailed financial information.

Uploaded by

Emmanuel Neshiri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Section A (20 marks): Answer the following questions

Use the following data to answer Questions 1-5.


A company is considering the purchase of a copier that costs $5,000. Assume a required
rate of return of 10% and the following cash flow schedule:
• Year 1: $3,000
• Year 2: $2,000
• Year 3: $2,000
1. What is the project's payback period?
A. 1.5 years.
B. 2.0 years.
C. 2.5 years.
D. 3.0 years.

2. What is the project's discounted payback period?


A. 1.4 years.
B. 2.0 years.
C. 2.4 years.
D. 2.6 years.

3. What is the project's NPV?


A. -$309.
B. +$243.
e. +$883.
D. +$1,523.

4. What is the project's IRR (approximately)?


A. 5%.
B. 10%.
C. 15%.
0.20%.

5. What is the project's profitability index (Pl)?


A. 0.18.
B. 0.72.
e. 1.18.
D. 1.72.

6. An analyst has gathered the following information about a company:


• Cost $10,000.
• Annual cash inflow $4,000.
• Life 4 years.
• Cost of capital 12%.
Which of the following statements about the project is least accurate?
A. The payback period is 2.5 years.
B. The IRR of the project is 21.9%; accept the project.
C. The discounted payback period is 3.5 years.
D. The NPV of the project is +$2,149; accept the project.

Use the following data for Questions 7 and 8.


An analyst has gathered the following data about two projects, each with a 12%
Required rate of return.

Project A Project B

Initial cost $15000 $20000

Life 5 years 4 years

Cash inflows $5000/year $7,500/year

7. If the projects are independent, the company should:


A. reject both projects.
B. accept Project A and reject Project B.
C. reject Project A and accept Project B.
D. accept both projects.

8. If the projects are mutually exclusive, the company should:


A. reject both projects.
B. accept A and reject B.
C. reject A and accept B.
D. accept both projects.

9. Fullen Machinery is investing $400 million in new industrial equipment. The present value of
the future after-tax cash flows resulting from the equipment is $700 million. Fullen currently has
200 million shares of common stock outstanding, with a current market price of $36 per share.
Assuming that this project is new information and is independent of other expectations about the
company, what is the theoretical effect of the new equipment on Fullen's stock price?
A. The stock price will remain unchanged.
B. The stock price will increase to $37.50.
C. The stock price will decrease to $33.50.
D. The stock price will increase to $39.50.

10. A project requires an outlay of $1.5m in year 0 and will repay cash flows in real terms (today’s
prices) as follows:
Year $’000
1 670
2 500
3 1,200
The company’s money cost of capital is 15.%. The project NPV if inflation is estimated to remain
at 5% per annum is
A.356 B 423
C 562 D 380
Section B (30 marks)
High manufacturing company, an independent company is considering the replacement of its
only machine, a manual one with an electric machine. The marketing officer of the company has
estimated that the replacement of the machine will result in an increase in sales of $100000. The
production department estimates that the purchase of the new machine will result in labor and
material savings of $80000. The new machine is expected to cost $600000 plus installation cost
of $20000. The machine is expected to last for 5 years and at the end of that life is expected to
have a salvage value of $120000. The machine will require an increase of $10000 in working
capital at the beginning of the project. The old machine is three years old, can last another 5
years when it will have a salvage value of $0. The machine was purchased for $400000 but has a
present market value of $175000. A special initial allowance of 25% per annum was granted
when the machine was purchased and the company has been availing all the available special
initial allowance annually. The present Special initial allowance is also 25/year for 4 years. The
tax rate is 35% and the company has a cost of capital 20%.
Calculate:
a) Initial investment of the project
b) Annual Cash flows for the project
c) Terminal CFs for the project
d) The NPV of the project
e) The profitability index of the project
f) The IRR of the project
g) The payback of the project
h) The ARR of the project

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