Project A Project B Project C Project D Project E Today (20,000) (30,000) (7,500
ID: 2795931 • Letter: P
Question
Project A Project B Project C Project D Project E
Today (20,000) (30,000) (7,500) (4,000) (6,000)
Year 1 10,000 6,000 2,000 2,000 750
Year 2 6,000 8,000 3,000 2,500 1,500
Year 3 4,000 10,000 4,000 3,000 2,250
Year 4 2,000 8,000 2,500 3,000
Year 5 1,000 6,000 2,000 3,750
Year 6 500 4,000 (8,000) 4,000
6. What is the payback period of project E?
a) 3 year
b) 3.5 years
c) 4.25 years
d) 5 years
7. What is the crossover rate between projects A and B?
a) 8.4%
b) 11.2%
c) 13.6%
d) There are multiple crossover rates
8. What is the NPV of project D if the cost of capital is 6%?
a) -34 b) 272 c) 466 d) 652
9. If A and C are repeatable, mutually exclusive projects, then which one is better if the
WACC is 8%?
a) Project A b) Project C
Explanation / Answer
Payback period = A + B/C
Where,
A = Last period with a negative cumulative cash flow;
B = Absolute value of cash flow at the end of the period A;
C = cash flow during the period after A.
6.
Payback period of project E:
Payback period = 3 + 1500/3000 = 3.5 years
7.
Cross over rate is where NPV A - NPV B = 0
(-20000 + 10000/(1+IRR)^1 + 6000/(1+IRR)^2 + 4000/(1+IRR)^3 + 2000/(1+IRR)^4 + 1000/(1+IRR)^5 + 500/(1+IRR)^6) - (-30000 + 6000/(1+IRR)^1 + 8000/(1+IRR)^2 + 10000/(1+IRR)^3 + 8000/(1+IRR)^4 + 6000/(1+IRR)^5 + 4000/(1+IRR)^6) = 0
By trail and error, IRR = 13.59% = 13.6%
8.
NPV = -4000 + 2000/(1+0.06)^1 + 2500/(1+0.06)^2 + 3000/(1+0.06)^3 + 2500/(1+0.06)^4 + 2000/(1+0.06)^5 + -8000/(1+0.06)^6 = $466
Year Cashflow (A) Cumulative 0 -6000.00 -6000.00 1 750.00 -5250.00 2 1500.00 -3750.00 3 2250.00 -1500.00 4 3000.00 1500.00 5 3750.00 5250.00 6 4000.00 9250.00Related Questions
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