MA - Ch- 14 (Capital Budgeting)

The details of an investment project are as follows:

Cost of asset bought at the start of the project $80,000

Annual cash inflow $25,000

Cost of capital 5% each year

Life of the project 8 years

What is the net present value of the project?

• -$120,000

• $120,000

• $81,575

• -$81,575

A company is planning to open a new store in a new geographic location. An initial site

evaluation has taken place at a cost of $5,000 and a store location has been found. The new

store can be rented for $9,500 per annum. It will require refurbishment at a cost of $320,000.

Which of the following costs are relevant for an NPV calculation?

(i) $5,000

(ii) $9,500

(iii) $320,000

• (i) only

• (i) and (ii)

• (ii) and (iii)

• (iii) only

What is the net present value to the nearest $ for the product?

What is the internal rate of return for this project?

• 16%

• 18%

• 20%

• 22%

The following measures have been calculated to appraise a proposed project

The internal rate of return is 12%

The return on capital employed is 16%

The cost of capital is 10%

The payback period is 4 years

Which of the following statements is correct?

• the payback is less than 5 years so the project should go ahead

• the IRR is lower than the return on capital employed so the project should not go ahead

• the IRR is greater than the cost of capital so the project should go ahead

• The IRR is positive so the project should go ahead

CC Company is considering an investment of $300,000 which will earn a contribution of

$40,000 each year for 10 years at todavs prices. The company's cost of capital is

11% per annum.

What is the net present value of the project?

• ($64,440)

• $23,556

• $64,440

• $235,560

JAH Company is about to invest $400,000 in machinery and other capital equipment for a

new product venture. Cash flows for the first three years are estimated as follows:

Year $000

1 210

2 240

3 320

JAH Company requires a 17% return for projects of this type.

What is the NPV of this venture?

• -$154,670

• $45,010

• $220,450

• $154,670

A company has determined that the net present value of an investment project is $17,706

when using a 10% discount rate and $(4,317) when using a discount rate of 15%.

What is the internal rate of return of the project to the nearest 1%?

A company is considering an investment of in new machinery. The machinery is

expected to yield incremental profits over the next five years as follows:

Year Profit

1 175,000

2 225,000

3 340,000

4 165,000

5 125,000

Thereafter, no incremental profits are expected and the machinery will be sold. It is company

policy to depreciate machinery on a straight line basis over the life of the asset. The

machinery is expected to have a value of $50,000 at the end of year 5.

What is the payback period of the investment in this machinery?

• 0.9 years

• 1.3 years

• 1.5 years

• 1.9 years

What is an interest rate that includes the effect of compounding known as?

• Nominal interest

• Simple interest

• Compound interest

• Effective interest