Question

1. Mike has just been asked to analyze an investment project to determine if it is acceptable. He notices that the project has cash flows as below. Apart from the initial investment of $1000, this project requires a major maintenance and additional investment in Year 3. Consequently, a net investment of $100 will be put into the project in Year 3. 0 Year 1 Year 2 Year 3 Year 4 -1000 300 400 -100 500 Mike has tried to use NPV and Internal Rate of Return methods to analyze this case. Considering the cash flows in this project, which additional method will you recommend to Mike before he makes the investment decision? A. Discount time value of money B. Modified Internal Rate of Return C. Average Accounting Return D. Profitability index E. Payback

Answer 1

1. Payback period is period it takes to recover the initial investment from a project. In other words, it is a period over which an investment becomes break even points.

When a decision cannot be reached based on IRR and NVP, payback period is another important financial decision tool. Hence. Option E is appropriate.

2. Secondary market transactions are those transactions which occur outside the primary market i.e. between a buyer and seller without access to the stock exchanges. For large number of shares to be exchanged, secondary market offers an efficient method.

3. Interest being levided ranges from 12-24% as APR.

Highest effective interest rate being levied is 24%.