Question

19. Monty Company is considering buying a machine for $340000 with an estimated life of 10 years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate net income of $6000 each year. The cash payback period on this investment is

28.33 years.

5.67 years.

8.50 years.

10.00 years.

20.

Use the following table,

	Present Value of an Annuity of 1
Period	8%	9%	10%
1	0.926	0.917	0.909
2	1.783	1.759	1.736
3	2.577	2.531	2.487

A company has a minimum required rate of return of 9%. It is considering investing in a project which costs $350000 and is expected to generate cash inflows of $150000 at the end of each year for three years. The net present value of this project is

$75000.

$29650.

$37965.

$379650.

21. The following information is available for a potential investment for Panda Company:

Initial investment	$110000
Net annual cash inflow	20000
Net present value	43650
Salvage value	10000
Useful life	10 yrs.

The potential investment’s profitability index is

3.55.

1.40.

5.50.

2.52.

22. A project with an initial investment of $64000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is

$79296.

$51655.

$71680.

$64000.

Answer 1

Answer-19)-Cash Payback period = 8.50 years.

Explanation- Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

In case when cash inflow are even, the formula to calculate payback period is:

Payback period =Initial investment / Annual Cash Inflow per period

= $340000/$40000

= 8.50 years

Where- Annual cash inflow = Net income+ Annual depreciation

= $6000+$34000

= $40000

Where- Annual straight-line depreciation = $34000

Explanation- Straight line Method-Depreciation Expense Annual

= Cost of asset- Salvage value of asset/No. of useful life (years)

=($340000-$0)/10 years

= $34000

20)- The net present value of this project is =$29650.

Explanation-Net present value = Present value of cash inflows – Total outflows

= ($150000*2.531)-$350000

= $379650-$350000

= $29650

21)- The potential investment’s profitability index is =2.52.

Explanation- Investment’s profitability index = Initial investment/Net present value

= $110000/$43650

= 2.52

22)- The present value of net cash flows is =$79296.

Explanation- Present value of net cash flows = Initial investment* Profitability index

= $64000*1.239

= $79296