ACF 103 - Fundamentals of Finance Tutorial 8 - Questions: Homework Problem
ACF 103 - Fundamentals of Finance Tutorial 8 - Questions: Homework Problem
ACF 103 - Fundamentals of Finance Tutorial 8 - Questions: Homework Problem
Tutorial 8 - Questions
Chapter 13
1. Your firm is considering two mutually exclusive projects, code-named A and
B, that would each require an initial cash outflow of $10,000. They would
generate the following incremental, after-tax, operating cash flows:
Project A Project B
Year 1 $5,000 $3,000
Year 2 4,000 4,000
Year 3 3,000 6,000
If the firm's required rate of return is 14%, which would you select?
A. Project A because it has the shorter payback period.
B. Project A because it has the higher net present value.
C. Project B because it has the higher internal rate of return.
D. Neither project because neither adds value to the firm.
2. A strip mine will have an initial cash outflow of $25 million and expected
after-tax, operating cash inflows of $5 million per year over its 10-year
economic life. However, the Environmental Protection Agency requires repair
and replanting of mined areas every five years. This will result in additional
after-tax outflows of $6 million in years five and ten. Based on this scenario,
which of the following statements is true?
A. The project's payback period is five years.
B. The value of this project today can be calculated as the sum of the cash
inflows minus the cash outflows.
C. A profitability index cannot be calculated for this project because there
are negative cash flows in some years.
D. This project may have more than one internal rate of return.
Homework problem
3. A firm is considering two mutually exclusive investment alternatives, both of
which cost $5,000. The firm's hurdle rate is 12%. The after-tax cash flows
associated with each investment are:
For each alternative, calculate the payback period, the net present value, and
the profitability index. Which alternative (if any) should be selected?