1. Chloe is considering an investment proposal that requires an initial investme
ID: 2510105 • Letter: 1
Question
1. Chloe is considering an investment proposal that requires an initial investment of $88,700, has predicted cash inflows of $28,000 per year for four years and no salvage value.
At a discount rate of 8 percent the projects net present value is:
a. $ 4,036
b. $15,256
c. $23,300
d. $92,736
2. The internal rate of return of the investment proposal presented in Question 2 is:
a. 8 percent
b. 10 percent
c. 12 percent
d. Less than 8 percent
3. The Salt Store is evaluating a capital expenditure proposal with the following predicted cash flows:
Initial investment $(75,000) Operations, each year for four years 25,000 Salvage 8,000
At a discount rate of 10 percent the project’s net present value is:
a. $ 4,250
b. $ 1,214
c. $ 9,714
d. $15,178
4. The payback period of the investment proposal presented in Question 4 is:
a. 0.123
b. 0.110
c. 0.223
d. 0.250
Explanation / Answer
Solution 1:
Initial investment = $88,700
Annual cash flows = $28,000
Discount rate = 8%
Present value of cash inflows = $28,000 * Cumulative PV Factor at 8% for 4 periods
= $28,000 * 3.312 = $92,736
NPV = Present value of cash inflows - Initital investment = $92,736 - $88,700 = $4,036
Hence option a is correct.
Solution 2:
Let IRR of project is i. Now at IRR, Present value of cash inflows will be equal to initial investment
Lets calculated PV of cash inflows at 10%:
= $28,000 * 3.169 = $88,732
It is nearest to Initial investment of $88,700. Hence IRR of project is 10%
Option b is correct.
Solution 3:
Initial investment = $75,000
Annual cash flows = $25,000
Salvage value = $8,000
Discount rate = 10%
Present value of cash inflows = $25,000 * cumulative PV Factor at 10% for 4 periods + $8,000 * PV factor at 10% for 4th period
= $25,000 * 3.170 + $8,000*0.683 = $84,714
NPV = $84,714 -$75000 = $9,714
Hence option c is correct.
Solution 4:
Payback period = 3 years.
Computation of cumulative cash Inflows Year Cash Inflows Cumulative Cash inflows 1 $25,000.00 $25,000.00 2 $25,000.00 $50,000.00 3 $25,000.00 $75,000.00 4 $33,000.00 $108,000.00Related Questions
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