You are considering a project that costs $300 and has expected cash flows of $11

Question

You are considering a project that costs $300 and has expected cash flows of $110, $121 and $133.10 over the next three years. If the appropriate discount rate for the project's cash flows is 10%, what is the net present value of this project?

            A) The NPV is negative

            B) $ 0.00

            C) $ 0.71

            D) $19.79

            E)   $64.10

      3.   A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?

            A) The project never pays back

            B) 4.75 years

            C) 5.00 years

            D) 5.33 years

            E)   6.00 years

      4.   Suppose a firm invests $600 in a project. The initial cost is depreciated straight-line to zero over 3 years. Net income from the project is $100, $125 and $140 in each of the three years of the project's life. What is the average accounting return?

            A) 18.25%

            B) 20.28%

            C) 35.49%

            D) 40.56%

            E)   60.83%

Explanation / Answer

2. NPV = PV of Cash Inflows - PV of Cash Outflows

= $110/1.10 + $121/1.102 + $133.10/1.103 - $300

= $100 + $100 + $100 - $300 = $0

Hence, B is the correct option.

3. Payback Period = Years before full recovery + [Unrecovered cost at the start of year / Cash Flow during the year]

= 5 + [$25/$75] = 5.33 years

Hence, Option D is correct.

4. average accounting return = Average Net Profit / Average Investment

= {($100 + $125 + $140) / 3} / $600

= $121.67 / $600

= 20.28%

Hence, Option B is correct.

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