Question 1

Following details are provided by Dopler Company. $$\begin{array} { | c | r | } 
\hline \text { Initial investment } & \$ 2,000,000 \
\hline \text { Discount rate } & 12 \% \
\hline \text { Yearly cash flows } & \
\hline 1 & \$ 200,000 \
\hline 2 & \$ 400,000 \
\hline 3 & \$ 400,000 \
\hline 4 & \$ 400,000 \
\hline 5 & \$ 200,000 \
\hline
\end{array}$$ Refer to the following table for PV factors:
$\begin{array}{|c|r|r|r|r|} 
\hline& 10 \% & 11 \% & {12 \%} & 13 \% \
\hline 1 & 0.909 & 0.901 & 0.893 & 0.883 \
\hline 2 & 0.826 & 0.812 & 0.797 & 0.783 \
\hline 3 & 0.751 & 0.731 & 0.712 & 0.693 \
\hline 4 & 0.683 & 0.659 & 0.636 & 0.613 \
\hline 5 & 0.621 & 0.593 & 0.567 & 0.543 \
\hline
\end{array}$ Calculate the NPV of the project.

Accepted Answer

The NPV is calculated by discounting each cash flow at 12% and subtracting the initial investment. The NPV is negative $850,000.

Question 2

Nobell Company is evaluating an investment of $1,000,000 which will yield net cash inflows of $142,369 per year for 10 years with no residual value. What is the internal rate of return? Present value of annuity of $1:
$$\begin{array} { | r | r | r | r | r | } 
\hline &{ 5 \% } & { 6 \% } & { 7 \% } &{ 8 \% } \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 \
\hline 2 & 1.859 & 1.833 & 1.808 & 1.783 \
\hline 3 & 2.723 & 2.673 & 2.624 & 2.577 \
\hline 4 & 3.546 & 3.465 & 3.387 & 3.312 \
\hline 5 & 4.329 & 4.212 & 4.1 & 3.993 \
\hline 6 & 5.076 & 4.917 & 4.767 & 4.623 \
\hline 7 & 5.786 & 5.582 & 5.389 & 5.206 \
\hline 8 & 6.463 & 6.21 & 5.971 & 5.747 \
\hline 9 & 7.108 & 6.802 & 6.515 & 6.247 \
\hline 10 & 7.722 & 7.36 & 7.024 & 6.71 \
\hline
\end{array}$$

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of the cash flows equal to zero. The investment of $1,000,000 divided by the annual cash inflow of $142,369 gives a factor of approximately 7.024, which corresponds to a 7% rate in the present value of annuity table.

Question 3

Following details are provided by VPN Company. $$\begin{array} { | c | r | } 
\hline \text { Initial investment } & \$ 5,000,000 \
\hline \text { Discount rate } & 15 \% \
\hline \text { Yearly cash flows } & \
\hline 1 & \$ 1,250,000 \
\hline 2 & \$ 1,350,000 \
\hline 3 & \$ 2,400,000 \
\hline 4 & \$ 1,150,000 \
\hline
\end{array}$$ Refer to the following table for PV factors:
$$\begin{array} { | r | r | r | r | } 
\hline & 13 \% & 14 \% & 15 \% \
\hline 1 & 0.885 & 0.877 & 0.87 \
\hline 2 & 0.783 & 0.769 & 0.756 \
\hline 3 & 0.693 & 0.675 & 0.658 \
\hline 4 & 0.613 & 0.592 & 0.572 \
\hline
\end{array}$$ What is the NPV of the project?

Accepted Answer

The answer of Following details are provided by VPN Company....

Question 4

A company is considering an iron ore extraction project which requires an initial investment of $1,000,000 and will yield annual cash flows of $350,263 for 4 years. The company's hurdle rate is 9%. Calculate IRR.

Accepted Answer

A) Calculation of IRR:
 11ea858e_d75c_ba67_a31f_d742929411e4_TB5023_00 11ea858e_d75c_e178_a31f_03561d453962_TB5023_00 Present value of annuity of $1:
 11ea858e_d75c_e179_a31f_a5cef9c4aa59_TB5023_00 At IRR, NPV = 0

Question 5

Which of the following best describes the profitability index?

Accepted Answer

The profitability index is defined as the ratio of the present value of future net cash inflows to the initial investment. It is calculated by dividing the present value of cash inflows by the initial investment. The profitability index measures the amount of value created per unit of investment. The higher the index, the more attractive the investment is.

Question 6

A company seeking investment opportunities has collected the following information. $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 400,000 & \$ 250,000 & \$ 150,000 & \$ 270,000 \
\hline \text { PV of cash inflows } & \$ 570,000 & \$ 295,000 & \$ 210,000 & \$ 282,000 \
\hline \text { Payback period (years) } & 3.6 & 3.0 & 4.75 & 3.5 \
\hline \text { NPV of project } & \$ 170,000 & \$ 45,000 & \$ 60,000 & \$ 12,000 \
\hline \text { Profitability index } & 1.43 & 1.18 & 1.40 & 1.04 \
\hline
\end{array}$$ If the company makes a decision based on the NPV, the most preferable project would be:

Accepted Answer

Project A has the highest NPV of $170,000, making it the most preferable project based on the NPV criterion.

Question 7

At the internal rate of return (IRR), the present value of cash inflows will be equal to:

Accepted Answer

At the IRR, the present value of cash inflows is equal to the initial investment. This is because the IRR is the discount rate at which the net present value (NPV) of a project is zero. Therefore, the present value of all cash inflows must be equal to the initial investment for the NPV to be zero.

Question 8

When comparing several investments with the same initial outlay, the decision should be made on the basis of:

Accepted Answer

The best choice is highest NPV because it takes into account the time value of money and provides a measure of the profitability of the investment over the entire investment period. It considers all cash inflows and outflows, and discounts them to present value using a required rate of return. The investment with the highest NPV would be the most profitable and desirable choice.

Question 9

The following details are provided by Dopler Company: $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 420,000 & \$ 200,000 & \$ 550,000 & \$ 500,000 \
\hline \text { PV of cash inflows } & \$ 570,000 & \$ 380,000 & \$ 800,000 & \$ 390,000 \
\hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \
\hline \text { NPV of project } & \$ 150,000 & \$ 180,000 & \$ 250,000 & ( \$ 110,000 ) \
\hline
\end{array}$$
- Calculate the profitability index for Project A.

Accepted Answer

The profitability index is calculated as the present value of cash inflows divided by the initial investment. For Project A, it is \$570,000 / \$420,000 = 1.36.

Question 10

Which of the following best describes the internal rate of return?

Accepted Answer

The internal rate of return (IRR) is the discount rate at which the present value of the expected net cash inflows from an investment equals the cost of the investment. In other words, it is the rate at which the investment breaks even. This is a commonly used metric to evaluate the profitability of an investment. Option B is describing the cost of borrowing, option C describes the return on investment, and option D is not a accurate definition.

Question 11

The following details are provided by Dopler Company: $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 420,000 & \$ 200,000 & \$ 550,000 & \$ 500,000 \
\hline \text { PV of cash inflows } & \$ 570,000 & \$ 380,000 & \$ 800,000 & \$ 390,000 \
\hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \
\hline \text { NPV of project } & \$ 150,000 & \$ 180,000 & \$ 250,000 & ( \$ 110,000 ) \
\hline
\end{array}$$
- What is the profitability index for Project C?

Accepted Answer

The profitability index is calculated as the present value of cash inflows divided by the initial investment. For Project C, it is \$800,000 / \$550,000 = 1.45.

Question 12

Canbera Company is considering investing $450,000 in telecommunications equipment which would have an estimated life of 5 years with zero residual value. The cash flows are as shown below: $$\begin{array} { | r | r | } 
\hline \text { Year 1 } & \$ 120,000 \
\hline 2 & \$ 235,000 \
\hline 3 & \$ 140,000 \
\hline 4 & \$ 98,000 \
\hline
\end{array}$$ The present value of $1 factors are given below:
$$\begin{array} { | r | r | r | r | r | } 
\hline & 10 \% & 12 \% & 13 \% & 14 \% \
\hline 1 & 0.909 & 0.893 & 0.885 & 0.877 \
\hline 2 & 0.826 & 0.797 & 0.783 & 0.769 \
\hline 3 & 0.751 & 0.712 & 0.693 & 0.675 \
\hline 4 & 0.683 & 0.636 & 0.613 & 0.592 \
\hline 5 & 0.621 & 0.567 & 0.543 & 0.519 \
\hline
\end{array}$$ The IRR of the project would be:

Accepted Answer

The IRR is the rate at which the present value of cash inflows equals the initial investment. By calculating the NPV at different rates, the IRR is found to be between 12% and 13%.

Question 13

Which of the following would be the best basis on whether to accept an investment opportunity or not?

Accepted Answer

The net present value takes into account the time value of money and provides a more accurate measure of the investment's profitability. A positive NPV indicates that the investment is expected to generate more cash inflows than outflows, making it a good basis for accepting the opportunity. The other options, while important considerations, do not provide as complete a picture of the investment's potential profitability.

Question 14

Which of the following is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset?

Accepted Answer

The rate of return based on discounted cash flows is typically calculated using the internal rate of return (IRR) method. The other options listed (ARR, bank interest rate, and return on investment) are not necessarily based on discounted cash flows and may not provide an accurate measure of the return on a capital investment.

Question 15

Gladeer Company is evaluating an investment that will cost $520,000 and will yield cash flows of $300,000 in the first year, $200,000 in the second year, and $100,000 in the third and final year. Use the tables below and determine the internal rate of return. Present value of $1:
$$\begin{array} { | l | r | r | r | r | } 
\hline &{ 8 \% } & { 9 \% } & { 10 \% } & 11 \% \
\hline 1 & 0.926 & 0.917 & 0.909 & 0.901 \
\hline 2 & 0.857 & 0.842 & 0.826 & 0.812 \
\hline 3 & 0.794 & 0.772 & 0.751 & 0.731 \
\hline 4 & 0.735 & 0.708 & 0.683 & 0.659 \
\hline 5 & 0.681 & 0.65 & 0.621 & 0.593 \
\hline
\end{array}$$ The IRR of the project will be:

Accepted Answer

The IRR is the rate at which the present value of cash inflows equals the initial investment. Calculating the present value of cash flows at 9% and 10% shows that the IRR is between these rates.

Question 16

The following details are provided by Dopler Company: $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 420,000 & \$ 200,000 & \$ 550,000 & \$ 500,000 \
\hline \text { PV of cash inflows } & \$ 570,000 & \$ 380,000 & \$ 800,000 & \$ 390,000 \
\hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \
\hline \text { NPV of project } & \$ 150,000 & \$ 180,000 & \$ 250,000 & ( \$ 110,000 ) \
\hline
\end{array}$$
- What is the profitability index for Project B?

Accepted Answer

The answer of The following details are provided by Dopler...

Question 17

Under conditions of limited resources, when a company is comparing several investments with different amounts of initial outlay, the decision should be made on the basis of:

Accepted Answer

The answer of Under conditions of limited resources, when a...

Question 18

Gamma Company is considering an investment opportunity with the following expected net cash inflows: Year 1, $250,000; Year 2, $350,000; Year 3, $395,000. The company uses a discount rate of 12% and the initial investment is $750,000. The following table is available:
Present Value of $1:
$$\begin{array} { | c | r | r | r | r | } 
\hline & 10 \% & 12 \% & 14 \% & 15 \% \
\hline 1 & 0.909 & 0.893 & 0.877 & 0.870 \
\hline 2 & 0.826 & 0.797 & 0.769 & 0.756 \
\hline 3 & 0.751 & 0.712 & 0.675 & 0.658 \
\hline 4 & 0.683 & 0.636 & 0.592 & 0.572 \
\hline \underline { 5 } & \underline { 0.621 } & \underline { 0.567 } & \underline { 0.519 } & \underline { 0.497 } \
\hline
\end{array}$$ The IRR of the project will be:

Accepted Answer

The IRR is the discount rate that makes the NPV of the cash flows equal to zero. By calculating the NPV at 12% and comparing it with the cash flows, we find that the IRR is slightly higher than 12%. Since the NPV at 12% is negative and at 14% it is positive, the IRR must be between 14% and 15%.

Question 19

Which of the following best describes the term sensitivity analysis?

Accepted Answer

Sensitivity analysis involves testing the results of an investment analysis with varying assumptions to determine how sensitive the outcome is to changes in the input variables. This helps to identify which assumptions have the greatest impact on the outcome and allows for more informed decision-making.

Question 20

The following details are provided by Dopler Company: $$\begin{array} { | l | r | r | r | r | } 
\hline & \text { Project A } & \text { Project B } & \text { Project C } & \text { Project D } \
\hline \text { Initial investment } & \$ 420,000 & \$ 200,000 & \$ 550,000 & \$ 500,000 \
\hline \text { PV of cash inflows } & \$ 570,000 & \$ 380,000 & \$ 800,000 & \$ 390,000 \
\hline \text { Payback period (years) } & 3.6 & 3.2 & 4.0 & 2.0 \
\hline \text { NPV of project } & \$ 150,000 & \$ 180,000 & \$ 250,000 & ( \$ 110,000 ) \
\hline
\end{array}$$
- Which project has the highest profitability index?

Accepted Answer