Question

Use the following information for problems 1-7. company is considering the purchase of a copier that costs $5,000. Assume a required return o and the followin following cash flow schedule where the cash flows represent cost savings attributable to the copier that occur at year end): Year 1: $3,000 Year 2: $2,000 Year 3: $2,000 hout adjusting for the time value of money, how long does it take to recover the copier's upfront cost? a. 1.5 years b. 2.0 years c. 2.5 years 2. At what discount rate does the copier have an NPV = $07 a. 10% b. 15% c. 21% 3. How much shareholder wealth is created by the project? a. -$309 b. $883 c. $1,523 4. After adjusting for the time value of money, how long does it take to recover the copier's upfront cost? a. 1.4 years b. 2.0 years c. 2.4 years 5. How much present value cash flow is earned per dollar invested in the copier? a. 0.72 - b. 1.18 c. 1.72 6. Where will the copier's NPV profile cross the x-axis? a. 21% b. $5,000 c. 10% 7. If the average annual net income earned on the copier was $1,000 and the average book val copier was $3,000, what is the average accounting rate of return? a. 20% b. 33% c. 300%

Answer 1

1)	Recovery
	Year 0	Cash Flow	Accumulated cash flow
	0	$         -5,000	$                                -5,000
	1	$          3,000	$                                -2,000
	2	$          2,000	$                                         -
	3	$          2,000	$                                  2,000
	2 Years
	Correct Option : B
2)	Year 0	Cash Flow
	0	$         -5,000
	1	$          3,000
	2	$          2,000
	3	$          2,000
	IRR =	21%
	Correct Option: C
3)	Year 0	Cash Flow	PV Factor at10%	PV of Cash Flow
	0	$         -5,000	1.000000	$   -5,000
	1	$          3,000	0.909091	$    2,727
	2	$          2,000	0.826446	$    1,653
	3	$          2,000	0.751315	$    1,503
		NPV		$        883
	Shareholders Wealth Created = $883
	Correct Option: B
4)	Year 0	PV of Cash Flow	Accumulated cash flow
	0	$         -5,000	$                                -5,000
	1	$          2,727	$                                -2,273
	2	$          1,653	$                                    -620
	3	$          1,503	$                                     883
	= 2years + 620/1653
	=2.4years
	Correct Option: C
5)	Present value of all cash flow
	=$2727+1653+1503
	=$5883
	Investment cost = $5000
	Earned per dollar invested
	=$5883/5000
	=1.18
	Correct Option: B
6)	At IRR
	IRRR = 21%
	Correct Option: A
7)	Accounting rate of return= average net income / average investment
	=$1000/3000
	33%
	Correct Option: B
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