Question

1. In the more complex situation discussed in the Gapenski article about Monte Carlo simulation, in addition to the throughput variable, the following second uncertain variable was analyzed:

a. project horizon

b. discount rate

c. accounts payable

d. salvage value

2. Suppose a project has cash flows of (-20, 5, 16, 5, 9, 2) in years (0, 3, 4, 5, 6, 7) respectively. What is IRR?
a. 53.86%

b. 27.98%

c. 17.32%

d. 14.44%

3. Suppose a project has cash flows of (-20, 5, 16, 5, 9, 2) in years (0, 3, 4, 5, 6, 7) respectively. What is Payback?

a. 6

b. 3

c. 4

d. 2

Answer 1

2. ANSWER = D)14.44 %

Year	Cash flow	PVF (14%)	PV (14%)	PVF (15%)	PV (14%)
0	-20	1	-20	1	-20
1	0	0.87719	0	0.86957	0
2	0	0.76947	0	0.75614	0
3	5	0.67497	3.3748576	0.65752	3.287581
4	16	0.59208	9.4732844	0.57175	9.148052
5	5	0.51937	2.5968433	0.49718	2.485884
6	9	0.45559	4.1002789	0.43233	3.890948
7	2	0.39964	0.7992746	0.37594	0.751874
			0.3445389		-0.43566

IRR = Where NPV of the project is equal to zero

Using trial and error method, we get

IRR = 14 % + (0.3445389 - 0) / [0.3445389 - (-0.43566)]

= 14 % + 0.4416

= 14.4416 % or 14.44%

3.

ANSWER= C) 4 YEARS

YEAR	Cash flow	Cumulative cashflow
1	0	0
2	0	0
3	5	5
4	16	21
5	5	26
6	9	35
7	2	37

Payback period = 3 + ( 5 -20 ) / (5-21)

= 3 + 0.9375

= 4 years (approx.)