Question

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1. 2010 Inc, imposes a payback cutoff of three years for its projects. If the company has the following two projects available, should it accept either of them? Assume cash flows occur evenly throughout the years.

Year	Cash Flow (A)	Cash Flow (B)
0	-$25,000	-$52,000
1	20,000	14,000
2	26,000	17,000
3	18,000	11,000
4	6,000	240,000

2. Based on the below cash flows, Hello Ltd. uses the NPV decision rule. At a required return of 12 percent, should the firm accept this project? What if the required return is 30 percent?

Year	Cash Flow
0	-$32,000
1	16,000
2	20,000
3	17,000

3. BOBO Company has identified the following two mutually exclusive projects:

Year	Cash Flow (A)	Cash Flow (B)
0	-$43,500	-$43,500
1	21,410	6,400
2	18,450	14,300
3	13,800	22,900
4	6,900	25,000

1. What is the IRR for each of these projects (Excel or financial calculator is required)? Using the IRR decision rule, which project should the company accept?
2. If the required return is 14 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule?

4. What is the profitability index for the following set of cash flows if the relevant discount rate is 8 percent? What if the discount rate is 25 percent?

Year	Cash Flow
0	-$15,100
1	7,600
2	6,800
3	6,900

5. Online company expects to pay the following dividends over the next four years: $11, $8, $5 and $2. Afterward, the company pledges to maintain a constant 5 percent growth rates in dividends forever. If the required return on the stock is 16 percent, what should the current share price be?

Answer 1

Solution :- (1)

Payback Period is the Period in which the amount paid for initial investment gets recovered

Here it is given that acceptable payback period is 3 years

B A 1 Solution :- (1) Year Project A Cash Flows ($25,000) $20.000 $26,000 $18,000 $6,000 Cummulative CF ($25,000) ($5,000) $21,000 $39,000 $45,000 2 3 Project B Cash Flows ($52,000) $14,000 $17,000 $11,000 $240,000 Cummulative CF ($52,000) ($38,000) ($21,000) ($10,000) $230,000

в 1 Solution - 1 4 Year 50 6 1 72 8 3 94 10 11 12 Year 130 14 1 Project A Cash Flows -25000 20000 26000 18000 6000 Cummulative CF =B5 =C5+B6 =C6+B7 =C7+B8 =C8+B9 Project B Cash Flows -52000 14000 17000 11000 240000 Cummulative CF =B13 =C13+B14 =C14+B15 =C15+B16 =C16+B17 15 2 18

In Project A the Cummulative Cash flows becomes positive in Year 2

means the Payback Period is in Between Year 1 and 2

Means after Year 1 but before Year 2

So Project A accepted

In Project B the Cummulative Cash flows becomes positive in Year 4

means the Payback Period is in Between Year 3 and 4

Means after Year 3 but before Year 4

So Project B is not accepted as acceptable period is 3 years

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