1. What is the payback period for the following set of cash flows?
Year Cash Flow
0 −$ 4,600
1 1,100
2 2,600
3 1,500
4 1,800
2.62 years
2.73 years
2.55 years
2.90 years
2.60 years
2. An investment project has annual cash inflows of $4,400, $5,500, $6,300 for the next four
years, respectively, and $7,600, and a discount rate of 11 percent.
What is the discounted payback period for these cash flows if the initial cost is $7,500?
0.79 years
1.79 years
2.54 years
1.29 years
3.58 years
3. Bruin, Inc., has identified the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0 –$36,300 –$36,300
1 18,600 6,400
2 14,100 12,900
3 11,600 19,400
4 8,600 23,400
a. What is the IRR for Project A?
b. What is the IRR for Project B?
c. If the required return is 11 percent, what is the NPV for Project A?
d. If the required return is 11 percent, what is the NPV for Project B?
e. At what discount rate would the company be indifferent between these two
projects?
5. A project that provides annual cash flows of $20,000 for 6 years costs
$63,000 today.
a. If the required return is 13 percent, what is the NPV for this project?
b. Determine the IRR for this project.
6. An investment project costs $14,100 and has annual cash flows of $3,500 for six
years.
a. What is the discounted payback period if the discount rate is zero percent?
b. What is the discounted payback period if the discount rate is 3 percent?
c. What is the discounted payback period if the discount rate is 22 percent?
7. Net present value:
is the best method of analyzing mutually exclusive projects.
is less useful than the internal rate of return when comparing different-sized projects.
is the easiest method of evaluation for nonfinancial managers.
cannot be applied when comparing mutually exclusive projects.
is very similar in its methodology to the average accounting return.
8. Samuelson Electronics has a required payback period of three years for all of its projects.
Currently, the firm is analyzing two independent projects. Project A has an expected payback period
of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1
years with a net present value of $26,400. Which project(s) should be accepted based on the
payback decision rule?
Project A only
Project B only
Both A and B
Neither A nor B
Either, but not both projects
Ans:
Project A is having the Net Present Value of $ 4200 and Payback period of 2.9 years
Project B is having the Net Present Value of $ 26400 and Payback period of 3.1 years
Ideally, the Project B is having significantly high NPV as compared to Project A and hence Project A is
more recommended that Project B.
However, since the company is having a threshold of 3 years as Payback period for its projects, in this
case, the company need to consider the Project A over Project B;
9. The length of time a firm must wait to recoup, in present value terms, the money it has invested
in a project is referred to as the:
net present value period.
internal return period.
payback period.
discounted profitability period.
discounted payback period.
10. The IRR that causes the net present value of the differences between two project's cash flows to
equal zero is called the:
required return.
zero-sum rate.
present value rate.
break-even rate.
crossover rate.
