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Tutorial Week 11 Questions

This document contains 6 questions about financial project evaluation techniques including net present value (NPV), internal rate of return (IRR), payback period, and discounted payback period. It asks the reader to calculate these metrics for sample projects and determine which projects should be accepted based on the evaluation criteria and whether the projects are independent or mutually exclusive.

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81 views2 pages

Tutorial Week 11 Questions

This document contains 6 questions about financial project evaluation techniques including net present value (NPV), internal rate of return (IRR), payback period, and discounted payback period. It asks the reader to calculate these metrics for sample projects and determine which projects should be accepted based on the evaluation criteria and whether the projects are independent or mutually exclusive.

Uploaded by

Logan zheng
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Session 2021/2022 – Semester I

EIA1001 Introduction to Financial Management


EIA1010 Introduction to Financial Management & Accounting

Coverage: Lecture Topic 10


Tutorial: Week 11

1. Two projects are under consideration by the same company at the same time. Project Alpha
has a NPV of $20 million and an estimated useful life of 10 years. Project Beta has a NPV
of $12 million and also an estimated useful life of 10 years. What should the company's
decision be?
a) if the projects involve unrelated expansion decisions or
b) if the projects are mutually exclusive because they would have to occupy the same
space?

2. What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of
$14,000 for the first two years, $10,000 for the next two years, and $8,000 for the fifth
year? Use a 10% discount rate. Would you accept the project?

3. Project November requires an initial investment of $500,000. The present value of


operating cash flows is $550,000. Project December requires an initial investment of
$750,000. The present value of operating cash flows is $810,000.
a) Compute the profitability index for each project.
b) If the the projects are mutually exclusive, does the profitability index rank them
correctly?

4. Black Friday Inc. has estimated the following cash flows for a project it is considering:

Period Cash Flow


0 ($150,000)
1 $70,000
2 $80,000
3 ($100,0000)

a) What is the payback period for this project?


b) What is the obvious problem with using the payback method in this case?

5. Becker Inc. uses discounted payback period for projects under $25,000 and has a cut off
period of four years for these small-value projects. Two projects, R and S, are under
consideration. The anticipated cash flows are listed in the following table. If Becker uses a
16% discount rate?

Cash Flow Project R Project S


Initial cost $24,000 $18,000
Cash flow year 1 6,000 9,000
Cash flow year 2 8,000 6,000
Cash flow year 3 10,000 6,000
Cash flow year 4 12,000 3,000
6. You must analyze two projects, X and Y. Each project costs $10,000, and the firm’s WACC
is 12%. The expected cash flows are as follows:
Year Project X Project Y
0 -10,000 -10,000
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
a) Calculate each project’s NPV, IRR, payback, and discounted payback.
b) Which project(s) should be accepted if they are independent?
c) Which project(s) should be accepted if they are mutually exclusive?

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