Question

Use the following to answer questions 17-20 bull plans to open a dou lde bathing center in a pinent will cost $56.000. Bill s the after-tax cash into annually for 8 years after which he plans to scrap the equip of Jamaica 8 bathing center in a storefront. The bathing xpects the after-tax cash inflows to be $15,000 sto scrap the equipment and retire to the beaches 17. What is the project's payback period? A) 2.79 years B) 3.03 years C) 3.73 years D) 4.33 years E) 5.67 years 18 19. Assume the required return is 10%. What is the project's NPV? A) $ 9.887 B) $13,354 C) $14,759 D) $20,029 E) $24.024 Assume the required return is 20%. What is the project's IRR? Should it be accepted? A) 16%, yes B) 16%; no C) 21%; yes D) 21%; no E) 28%; indifferent Assume the required return is 20%. What is the project's Pl? Should it be accepted? A) 0.89: yes B) 0.89; no C) 1.00; indifferent D) 1.03: yes E) 1.03; no 20. 21. The stock of MTY Golf World currently sells for $90 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now? A) S 90.00 B) S 95.40 C S 97.40 D) $ 99.80 E) $112.78

Answer 1

NPV is given by:

NPV = L Rt/(1 + i) ,t varies from 1 ton where Rt = Cash flow netted (Inflow - Outflow) during the period "t" i = Discount rate t = number of periods

Now, the discount rate at which NPV = 0 is known as IRR

Answer 17)

Payback period: Time in which we will regain our initial investment

Project
Initial Investment		56,000
year	Cashflow	Cummulative Cashflow
1	15,000	15,000
2	15,000	30,000 (15000 + 15000)
3	15,000	45,000 (15000 + 30000)
4	15,000	60,000 (15000 + 45000)
5	15,000	75,000
6	15,000	90,000
7	15,000	1,05,000
8	15,000	1,20,000

So in year 3 we get $ 45,000 money back of the invested money $ 56000

So remaining money (56000 - 45000) = $ 11000 needs to retrieved from year 4.

Now, in year 4 we are earning $ 15000

Hence, to earn  $ 11000, it will take = $ 11000 / 15000 = 0.73 Years

Hence, total payback period = Year 3 + 0.26 (Year 4) = 3.73 Years (Option C)

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Answer 18)

SUMIE XV fx =NPV(C1,04:C11)+C3 DE В Discount Rate Year 10% Project -$56,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 10.60% =NPV(C1, C4:C11 )+ C3 7 8 IRR NPV

C13 fx =NPV(C1,C4:C11)+C3 B co DE Discount Rate 10% Year Project -$56,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 IRR 10.60% NPV $24,024!

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Answer 19)

SUMIE X fx =NPV(C1,04:C11)+c3 A B C D E Discount Rate 20% Year Project oll $56,000] 1 $15,000 $15,000 3 $15,000 $15,000 5 $15,000 6 $15,000 $15,000 8 $15,000 IRR 20.93% NPV =NPV(C1, C4:C11 )+ C3

SUMIE XV fx =IRR(C3:C11) A B Discount Rate 20% Year Project 0 $56,000 1 $15,000 $15,000 $15,000 $15,000 $15,000 6 $15,000 7 $15,000 8 $15,000 IRR E IRR( C3:C11 ) NPV $1,557 5

C12 B fx =IRR(C3:011) A D B Discount Rate Year 0 1 2 C 20% Project -$56,000| $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 20.93% $1,5571 4 5 6 7 8 IRR NPV

Hence, IRR is 21% and since IRR > WACC, company should ACCEPT the project.

Hence Option C

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Answer 20)

Profitability Index = PV of Future Cashflows / Initial Investment

SUMIF , X v fx =NPV(C1,C4:011) АА D L Discount Rate 20% Year Project o l -$56,000 1 $15,000 2 $15,000 3 $15,000 4 $15,000 5 $15,000 6 $15,000 $15,000 8 $15,000| =NPV(C1, C4:011)

012 @ fx =NPV(C1,C4:011) A D B Discount Rate Year 0 2 3 20% Project -$56,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $57,557.40| 4 5 6 12 | PV O -

Hence, PI = 57557.40 / 56000

PI = 1.02781 = 1.03

Since, PI > 1 we should ACCEPT the project.

Hence OptionD