Highfield Co. is considering a project that will require an initial cash outlay

Question

Highfield Co. is considering a project that will require an initial cash outlay of $78,120 today. The project has a five-year life and will generate cash flows of $20,608 every year for next five years. The required rate of return is 15%. What is the payback period?

3.9349

2.8706

3.7908

4.6218

2 points   

QUESTION 2

Given the information in Question 1, what is the net present value?

-$9,038.79

$7,812.03

$3,790.80

$9,038.79

2 points   

QUESTION 3

Given the information in Question 1, what is the internal rate of return?

8%

12%

10%

6%

2 points   

QUESTION 4

Given the information in Question 1, what is the profitability index?

1.8843

-1.8843

0.8843

-0.8843

2 points   

QUESTION 5

Given the information in Question 1, what is the maximum price that Highfield has to pay if the target profitability index is 1.2?

$82,098.45

$57,567.68

$78,120

$65,248.13

1 points   

QUESTION 6

Given the information in Question 1, what is the minimum annual cash flow that project has to generate in order to accept the project?

$19,376.93

$23,304.41

$22,403.52

$20,608

a.

3.9349

b.

2.8706

c.

3.7908

d.

4.6218

Explanation / Answer

QUESTION - 1

Correct option (c).

Payback period (PBP) is the time by when a project recovers its initial investment, i.e. the cumulative cash flows become 0.

From above table, PBP lies between years 3 & 4.

PBP = 3 + (Absolute value of Cumulative cash flow of year 3 / Cash flow of year 4)

= 3 + (16,296 / 20,608)

= 3 + 0.79 = 3.7908 years

QUESTION - 2

Correct option (a).

NPV is the sum of all discounted cash inflows & outflows. As computed in the table, NPV = - $9,038.79.

NOTE: First 2 questions are answered.

Year Cash Flow($) Cumulative Cash Flow($) Discount factor @15% Discounted cash flow($) (A) (B) (A) x (B) 0 -78,120 -78,120 1.0000 -78,120.00 1 20,608 -57,512 0.8696 17,920.00 2 20,608 -36,904 0.7561 15,582.61 3 20,608 -16,296 0.6575 13,550.09 4 20,608 4,312 0.5718 11,782.69 5 20,608 24,920 0.4972 10,245.82 NPV ($) = -9,038.79

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