25300 Chapter Notes - Chapter 8: Net Present Value
Tutorial questions 25300 FBF
Tutorial 6 – Capital Budgeting 1
1. (a) If management requires projects to have a 3-year payback, would it accept either of the following
two independent projects? Explain.
Year
Cash flows (A)
Cash flows (B)
0
-$55,000
-$95,000
1
19,000
18,000
2
19,000
18,000
3
19,000
18,000
4
19,000
230,000
(b) What is the NPV of project B assuming the discount rate is 14%.
(c) Sketch the NPV profile for project B. Also indicate the point when the discount rate is 37.01%.
2. A company is evaluating the following two mutually exclusive projects. The company mandates a
three-year project payback. The required return is 10%.
Year
Project F
Project G
0
-$150,000
-$235,000
1
44,000
77,000
2
68,000
77,000
3
40,000
77,000
4
60,000
77,000
5
54,000
77,000
(a) Calculate the payback period for both projects.
(b) Calculate the NPV for both projects.
(c) Calculate the PI for both projects.
(d) Which project, if any, should the company accept?
(e) What can we infer about the IRRs for these projects?
3. “If a project has a negative NPV then its PI will be less than one.” Is the preceding statement true or
false? Explain.
(Answers: 1. (a) A: 2.89 accept, B: 3.18 reject, (b) $82,967.84, 2. (a) F: 2.95, G: 3.05, (b) F: $50,761.50, G: $56,890.58,
(c) F: 1.34, G: 1.24, (d) G, (e) Both > 10% , 3. True)
