Question

os the market exceeds the earning per share. s used to calculate the number of times the price being paid for on the market exceeds the dividend per share. The P/E ratio is a measure of confidence in the a is a measure of confidence in the ability of the company to maintain its earnings in futhure the value of a share of stock in the market a rets muiplier applied to current earnings to determine Table I: Net cash flows for three projects Project Z Project Y 1600 1600 1600 1600 4800 3200 8000 en that you wish to use the payback rule with a cut-off period of two years, which projects in Table 1 would you accept? a Project X b. Project Y c. Project Z d. None of the above. 16. Which of the following statements is true regarding the payback rule? a. The payback rule states that a project should be accepted if its payback period is more than a specified cutoff period The payback rule emphasizes cash flows that arrive after the payback period b. c. The payback rule considers the value of money, so it emphasizes that the d. The payback rule will bias the firm against accepting long-term projects because cash flows that arrive after the payback period are ignored. Table 2: Cash flows for a project more distant flows are less valuable Year Cash Flow8500 3 350040004000 17. The project in Table 2 has an Internal Rate of Return (IRR) of approximately Hint: Begin with a discount rate of 16% in your calculations a. 16% b. 16.38% c. 1790 d. 17.45% 第4页共10页

MULTIPLE CHOICES

Answer 1

(15): The answer is option “b” – Project Y.

Explanation: The table below shows the payback computation and we can see that payback for X is 3 years, for project Y is 2 years and for Z is 3 years.

Year	Project X	Cumulative cash flow	Project Y	Cumulative cash flow	Project Z	Cumulative cash flow
0	-8,000.00	-8,000.00	-1,600.00	-1,600.00	-8,000.00	-8,000.00
1	1,600.00	-6,400.00	0.00	-1,600.00	1,600.00	-6,400.00
2	1,600.00	-4,800.00	1,600.00	0.00	1,600.00	-4,800.00
3	4,800.00	0.00	3,200.00	3,200.00	4,800.00	0.00
4	0.00	0.00	4,800.00	8,000.00	8,000.00	8,000.00

(16): The answer is option “d” – the payback rule will bias the firm against accepting long term projects because cash flows that arrive after the payback period is ignored.

Explanation: The payback rule is biased in favor of short term investments and projects as only the cash flows that occur till the payback time are considered and rest are ignored and not considered at all.

(17): The answer is option “b” – 16.38%

Explanation: At 16% we are getting a positive NPV and at 16.38% we are getting an NPV of -1.73 which is very close to 0.

Year	Cash flow	1+r	PVIF	PV
0	-8,500.00	1.1638	1.0000	-8,500.00
1	3,500.00		0.8593	3,007.39
2	4,000.00		0.7383	2,953.27
3	4,000.00		0.6344	2,537.61
			NPV	-1.73

At 16.368% we get a NPV of 0

Year	Cash flow	1+r	PVIF	PV
0	-8,500.00	1.16368	1.0000	-8,500.00
1	3,500.00		0.8593	3,007.70
2	4,000.00		0.7385	2,953.89
3	4,000.00		0.6346	2,538.41
			NPV	0.00