Corporate Finance - Corporate Finance Section 1

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46. The project has the following annual cash flows:

Year 0  Year 1Year 2Year 3Year 4
- 85,540 $42,100$23,025$30,200$16,000

  • Option : B
  • Explanation :
    Year Cash flow Discounted cash flow[ CFn / (1.07)^n ]Cumulative discountedcash flow:[CF0 – Cumulative PVcash flows]
    -85,540-85,540-85,540
    42,10039,346 -46,194
    2   23,02520,111-26,083
    3  30,20024,652-1,431
    4  16,00012,206 
    The discounted payback is 3.1 years: [ 3 + (1,431 / 12,206) ].
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47. A project investment of $100 generates after-tax cash flows of $50 in Year 1, $60 in Year 2, $120 in Year 3 and $150 in Year 4. The required rate of return is 15 percent. The net present value is closest to:

  • Option : A
  • Explanation : NPV = -100 + 50/1.15 + 60/(1.15)^2 + 120/(1.15)^3 + 150/(1.15)^4 = 153.51.
    Using a financial calculator, enter the cash flows.
    CF0 = - 100, CF1 = 50, CF2 = -60, CF3 = 120, CF4 = 150, I = 15, CPT NPV.
    NPV = 153.51.
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48. A project manager is working on a complicated large-scale project for a company that will require multiple investments over time while giving cashinflows in some years over a period of four years. He develops the following cash flow schedule for his project:

Year 0-£900,000.00
Year 1 £6,344,400.00
Year 2- £8,520,364.00
Year 3 £2,245,066.00
Year 4 £650,000.00

  • Option : C
  • Explanation : The question requires that NPV be found at each of the discount rates given as answer choices. When the NPV of cash flows is negative, the project is least likely to be undertaken.
    Using a financial calculator, first enter the cash flows.
    CF0 = - 900,000, CF1 = 6,344,400, CF2 = -8,520,364, CF3 = 2,245,066, CF4 = 650,000
    Then, determine the NPV for each of the given discount rates When I = 13%, CPT NPV = -3,581
    When I = 16%, CPT NPV = +34,600 When I = 18%, CPT NPV = +59,097
    Hence, project will least likely be undertaken when the discount rate is 13% as the NPV is negative, while at the other two discount rates it is positive.
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50. A project has the following annual cash flows:

Year 0  Year 1Year 2Year 3
-450,000 -1,000,0001,000,0001,000,000

  • Option : C
  • Explanation : Enter the following values in a financial calculator: CF0 = -450,000, CF1 = -1,000,000, CF2 = 1,000,000, CF3 = 1,000,000, CPT IRR. IRR = 19.47%.
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