Question

A company invests $40,000 in a project with the following net cash flows:

Year 1: $3,000

Year 2: $8,000

Year 3: $14,000

Year 4: $19,000

Year 5: $22,000

Year 6: $28,000

In what year does payback occur?

Year 5

Year 4

Year 6

Year 3

Which of the following describes the securities underwriting process?

• a) An investment bank helps to connect a private company with sources of capital.

• b) An investment bank determines if a company can afford to go public.

• c) An investment bank responsible for market liquidity quotes a bid price and an ask price for a security.

• d) A company sells its securities to an investment bank, who then sells the securities to market participants.

Answer 1

Following is the summary of cumulative net cash flows:

Year	Net Cash flow ($)	Cumulative Net Cash flows ($)
1	3,000	3,000
2	8,000	11,000
3	14,000	25,000
4	19,000	44,000
5	22,000	66,000
6	28,000	94,000

Pay Back Period

=Payback period lie between 3 to 4 years.
Since up to 3 years a sum of $25,000 will be recovered balance of $15,000 will get recovered in the part of 4th year, computation is as follows:

=unrecovered cash Outflow/Net cash inflows of year 4*no.of days in year

=15,000/19,000×365

=288.16 days

So, 289 days approximately

So, payback period is 3 years 289 days

It means payback period occur in Year 4.

Which of the following describes Securities underwriting process

Answer is option d

I.e Company sell its securities to Investment Bank w,then sells the securities to market participants.