Capital Budgeting

Company A invests $ 250,000 in a project that is expected to have cash inflow of $ 50,000 for year 1 and 2, and $100,000 for year 1 until 6. Calculate the payback period

Select the disadvantages of payback period

• It does not consider the time value of money

• It does not consider the cash flows beyond the payback period

• It does not consider the cash initial outlay beyond the payback period

• It does not consider the time taken to recover back initial investment

Initial outlay = $ 1 million

Cash inflows from year 1 until 5 = $ 250,000

Discount rate = 8%

Calculate the NPV ( 2 decimal places)

The Payback Period (PBP) will always select the investment that

• Gives the highest rate of return

• Returns the cost of investment first

• Has the highest total net cash flow

The initial investment is £5,000. In the first year the firm paid back £1,000 in the second year £2,000 and the third year 3,000. The payback period for the investment is:

• 2 years

• 3 years

• 3 years 4 months

• 2 years 8 months

NPV will be positive if

• Companies work hard

• Discounted cash flows justify initial investment

• Money is given back

• They won't be

The amount of time taken to generate sufficient cash to cover its own investment costs is called ...

• Return period

• Payback period

• Depreciation period

• Investment period

17-The following cash flow are provided

Year 0 = Cash outflow = $170,000

Year 1 = Cash Inflow = $20,000, Year 2 = $35,000, Year 3 = $100,000, Year 4 = $250,000 

Calculate NPV? If Require Rate Return r= 15%

• A = 80,000

• B = 81,500

     

• C = 82,546

• D = 82,500

18-The following cash flow are provided

Year 0 = Cash outflow = $200,000

Year 1 = Cash Inflow = $25,000, Year 2 = $35,000, Year 3 = $70,000, Year 4 = $300,000 

Calculate payback period?

• A = 4 Ys

• B = 3.7 Ys

• C = 3.233 Ys

• D = 3.15 Ys

For an investment to be considered acceptable, the NPV must be ...

• Greater than zero

• Less than zero

• Equal to the initial investment

• Greater than the payback period