Question

- 5 IBX Pty Ltd is considering the purchase of a new machine that is expected to save the company $89,000 at the end of each year in reduced wages.

The machine costs $279,000, plus another $14,000 to be installed. It is expected to last for five years after which it can be sold as scrap for $53,000. Operating expenses (such as fuel and maintenance) are $8,000 pa.

a)Determine the annual net cash flows of this investment (ignore the effect of taxes). Enter the information in the following table. Indicate whether cash flows are + or -:

Time	0	1	2	3	4	5
Net Cash Flow

b)Calculate the NPV if the required rate of return is 14% pa. Give your answer in dollars and cents to the nearest cent.

NPV_14% = $

c)Calculate the NPV if the required rate of return is 16% pa. Give your answer in dollars and cents to the nearest cent.

NPV_16% = $

6. A company that analyses projects based on after tax cash flows is considering investing in a project. Accepting this project will cause an increase in the company's expected level of income tax payable. This additional amount of tax:

	A must be taken into account when analysing the project as an additional cash outflow
	B must be taken into account when analysing the project as an additional cash inflow
	C only affects accounting profits and not cash flows which means it will not affect the capital budgeting decision
	D only affects cash flows and not accounting profits which means it will not affect the capital budgeting decision

7. You are the finance manager for your company. You and your team have been analysing two mutually exclusive projects. The first project initially costs $1,000 and will return cash flows of $200 per year for the next six years. The second project initially costs $1,500 and will return $600 per year for the next three years.

The method that would not be correct when comparing these two projects is:

A	Calculate the net present value of each project over a six year period (by running the second project twice) and select the project with the highest net present value.
B	Calculate the net present value of each project if each project was repeated an infinite number of times and select the project with the highest net present value.
C	Calculate the net present value of each project for their lifetimes and select the project with the highest net present value.
D	Calculate the Equivalent Annual Annuity (EAA) of each project to find the annual annuity payment that has the same net present value as each project and select the project with the highest annuity payment.

- 8. KLM Flights are currrently in a financial crisis, and are looking at methods to decrease costs to stay afloat. The company is considering the purchase of a new computerised system that is expected to save the company $63,000 at the end of each year in reduced wages.

The system costs $230,000, plus another $10,000 to be installed. It is expected to last for five years after which it can be sold for $55,000. Operating expenses (such as electricity and maintenance) are $7,000 pa.

a)Determine the annual net cash flows of this investment (ignore the effect of taxes). Enter the information in the following table. Indicate whether cash flows are + or -:

Time	0	1	2	3	4	5
Net Cash Flow

b)Calculate the NPV if the required rate of return is 10% pa.

NPV_10% = $

c)Calculate the NPV if the required rate of return is 12% pa.

NPV_12% = $

- 9. A particular business venture has a net present value of +$150. Which of the following statements is false?

	A The venture inflows are greater than the venture outflows
	B The venture should be accepted
	C The venture makes a profit of $150
	D The return on the venture is more than the required rate of return

- 10 Consider the following investment opportunities. Assume that all projects end after year five and have the same salvage value.

	Project A	Project B	Project C
Initial investment	$50,000	$50,000	$50,000
Year	Operating net cash flows
1	$20,000	$50,000	$10,000
2	$20,000	$30,000	$20,000
3	$20,000	$15,000	$30,000
4	$20,000	$5,000	$25,000
5	$20,000	$0	$15,000
Average	$20,000	$20,000	$20,000

Based on your knowledge of capital budgeting, select all the following conclusions that can be made from the information provided:

	without knowing the discounting criteria used it is impossible to determine the suitability of each project
	A all projects are acceptable investments
	B Project B is the most preferred project
	C none of the projects are acceptable investments
	D all projects are of equal value

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