1. An outlay of $180 is expected to yield the following cash flows: Year 1 2 3 4
ID: 1175160 • Letter: 1
Question
1. An outlay of $180 is expected to yield the following cash flows:
Year
1
2
3
4
Net Cash Flow
$75
$55
$60
$25
Given the cost of capital is 12%, what is the payback period?
a) 3.25 years
b) 3.00 years
c) 2.83 years
d) 2.72 years
2. How many internal rate of return (IRR) can this 5-year project possibly have?
Year
0
1
2
3
4
5
Cash Flow
-$200
+$80
+$60
-$50
+$75
+$60
a) 1
b) 2
c) 3
d) 4
3. A project with a rapid payback will have a positive net present value. True or false?
Year
1
2
3
4
Net Cash Flow
$75
$55
$60
$25
Explanation / Answer
1). Payback Period = Years before full recovery + [Unrecovered cost at start of the year / Cash Flow during the year]
Payback Period = 2 + [$50/$60] = 2 + 0.83 = 2.83 years
2). This Cash Flow series is non-conventional cash-flow pattern, which has two sign changes. It has cash outflow followed by cash inflows followed by cash outflow. It has two IRRs.
Hence, Option "B" is correct.
3). True; As Payback Period means the length of time required for an investment to recover its initial outlay in terms of profits or savings, and if it is rapid which means the initial costs are covered early which means it left with more inflows, which results into positive cash flows.
Year Cash Flow Cummulative Cash Flow 0 -$180 -$180 1 $75 -$105 2 $55 -$50 3 $60 $10 4 $25 $35Related Questions
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