Investment Appraisal

An investor deposits $10,000 in a fund that pays 6% interest compounded annually. What will be the value of the investment at the end of 5 years (to the nearest dollar)?

How much should be invested today to accumulate $15,000 in 4 years at a compound interest rate of 8% per annum (to the nearest dollar)?

A company is evaluating a project that provides perpetual annual cash inflows of $12,000. If the cost of capital is 10%, what is the present value of the project?

A machine generates annual savings of $5,000 forever. If the firm’s cost of capital is 12%, what is the maximum price the company should pay for this machine?

• $41,667

• $60,000

• $50,000

• $24,000

A project generates $20,000 per year for 4 years starting at the end of Year 2. If the discount rate is 10%, what is the present value of the cash inflows (to the nearest ten dollars)?

• $41,120

• $75,820

• $63,400

• $57,640

A machine will generate cash inflows of $15,000 annually for 5 years, starting from the end of year 3. The discount rate is 8%. What is the present value of these inflows (to the nearest ten dollars)?

• $51,350

• $47,550

• $59,900

• $39,440

A company buys equipment for $100,000, eligible for 25% reducing balance capital allowance. The company pays tax at 30% and the discount rate is 10%. The useful life is 4 years for the equipment. What is the present value of tax savings on capital allowance? (to the nearest hundred dollars)

• $16,800

• $54,300

• $23,300

• $54,200

A project requires an initial investment of $60,000 and additional working capital of 10,000 at the start. The project generates net cash inflows of $18,000 annually for 5 years. The working capital will be recovered in full at the end. The discount rate is 10%. What is the NPV of the project (to the nearest hundred dollars)?

• $14,400

• $4,400

• $ (1,800)

• $8,200

A project has the following cash flows: Year 0: - $100,000; Year 1-3: 40,000 each. What is the IRR, and is the project acceptable if the cost of capital is 10%?

• IRR is approximately 13.1%, and the project is acceptable.

• IRR is approximately 9.7%, and the project is not acceptable.

• IRR is approximately 10%, and the project is just acceptable.

• IRR is approximately 6.7%, and the project is not acceptable.

A company has a capital budget of $100,000 and is evaluating the following projects:

  Initial Cost NPV

A $50,000 $20,000

B $40,000 $18,000

C $30,000 $14,00

Which combination of divisible projects should be selected to maximize NPV?

• A + B

• C + B + 60% of A

• A + C

• Full A + 50% of B