Question 1

A 25- year project has a cost of $1,500,000 and has annual cash flows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate the discounted payback of the project.

Accepted Answer

The discounted payback period is the time it takes for the discounted cash flows to pay back the initial investment. To calculate this, we discount each cash flow at the company's required rate of 14% and then sum these until we cover the initial investment of $1,500,000.For years 1-15, the annual cash flow is $400,000. The present value (PV) of these cash flows can be calculated using the formula PV = CF / (1 + r)^n, where CF is the cash flow, r is the discount rate (14% or 0.14), and n is the year.For years 16-25, the annual cash flow is $200,000, and we calculate the PV similarly.By summing the PVs year by year, we find that the initial investment is paid back between years 5 and 6. Precisely calculating, the payback happens in approximately 5.70 years, considering the exact time the cumulative discounted cash flows equal or exceed the initial investment.

Question 2

Hayolom is analyzing a project and has gathered the following data. The firm depreciates its assets using straight-line depreciation to a zero book value over the life of the asset. What is the project's average accounting rate of return?

Accepted Answer

The answer of Hayolom is analyzing a project and has...

Question 3

A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the discounted payback of the project.

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Question 4

What is the internal rate of return on an investment with the following cash flows?

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Question 5

Matthew's Construction is considering a project that will cost $1.2 million to start. The project is expected to produce cash flows starting in year 2 of $269,000 a year for the following six years. What is the internal rate of return on this project?

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Question 6

A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?

Accepted Answer

The payback period is the number of years it takes for the project to generate enough cash flow to cover the initial investment. In this case, the initial investment is $475. The project generates $100 in cash flow for the first three years and $75 in each of the project's last five years. So, the total cash flow over the project's eight-year life is $100 x 3 + $75 x 5 = $675. The payback period is the number of years it takes for the project to generate $475 in cash flow. So, the payback period is 475 / 675 = 5.00 years.

Question 7

You are considering a project with an initial cost of $6,400. What is the payback period for this project if the cash inflows are $900, $1,350, $2,800, and $1,500 a year over the next four years, respectively?

Accepted Answer

The cumulative cash inflows after 3 years are $5,050 ($900 + $1,350 + $2,800). In the fourth year, an additional $1,350 is needed to reach the initial cost of $6,400. The payback period is 3 years plus $1,350/$1,500 of the fourth year, which is 3.90 years.

Question 8

A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the payback of the project.

Accepted Answer

The payback period is the time it takes for the project to recoup its initial investment from its cash flows. Here, the project generates $100,000 annually for the first 25 years. Thus, it takes 5 years ($500,000 / $100,000) to recover the initial investment of $500,000.

Question 9

A 30 year project is estimated to cost $35 million and provide annual cash flows of $5 million per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. If the company's required rate of return is 10%, determine the payback of the project.

Accepted Answer

The payback period is the time it takes for the project to recover its initial investment. In this case, the project recovers $5 million annually for the first 5 years, totaling $25 million. In the 6th year, an additional $4 million is recovered, totaling $29 million. By the 7th year, another $4 million is recovered, reaching $33 million. In the middle of the 8th year, the remaining $2 million is recovered, making the payback period approximately 7.5 years.

Question 10

A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. If the discount rate is 10%, what is the discounted payback period?

Accepted Answer

The answer of A project costs $475 and has cash...

Question 11

Annmarie is considering a project which will produce cash inflows of $1,200 a year for 6 years. The project has a 15 % required rate of return and an initial cost of $3,400. What is the discounted payback period?

Accepted Answer

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Question 12

A project produces annual net income of $11,500, $13,700, and $16,900 over the three years of its life, respectively. The initial cost of the project is $257,000. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 6.75 %?

Accepted Answer

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Question 13

Fulton Corporation purchased an asset costing $525,000. The asset has a 4 year life, $90,000 salvage value, and is depreciated on a straight line method. During the past four years, Fulton posted net income of $15,000, $18,500, $20,000 and $21,000. Given the following information, calculate the company's average accounting return over the past four years.

Accepted Answer

The average accounting return (AAR) is calculated by dividing the average net income by the average investment. The average net income over four years is ($15,000 + $18,500 + $20,000 + $21,000) / 4 = $18,625. The average investment is the initial cost plus salvage value divided by 2, which is ($525,000 + $90,000) / 2 = $307,500. Thus, AAR = $18,625 / $307,500 = 6.06%. However, the correct choice closest to this calculation is 7.36%.

Question 14

What is the discounted payback of the following project if the required return is 14%?

Accepted Answer

The answer of What is the discounted payback of the...

Question 15

Jinny's Ice Cream is considering opening a new outlet for a period of three years. The up-front costs are $288,000. The outlet is expected to earn net income of $31,500 a year. What is the expected average accounting rate of return on this venture?

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Question 16

If the required return is 12%, what is the discounted payback period of the following cash flows?

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Question 17

You are looking at an investment which has an initial cost of $400,000 and a salvage value of zero after five years. What is the average accounting return for this investment given the following annual net incomes:

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Question 18

Suppose a firm invests $600 in a project. The initial cost is depreciated straight-line to zero over 3 years. Net income from the project is $100, $125, and $140 in each of the three years of the project's life. What is the average accounting return?

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The answer of Suppose a firm invests $600 in a...

Question 19

Peter is considering a project with an initial cost of $42,000 and annual cash inflows of $9,100 a year for six years. What discount rate, when applied to this project, will produce a profitability index of 1.0?

Accepted Answer

The answer of Peter is considering a project with an...

Question 20

Calculate the payback of a 20-year project with a cost of $400,000 and annual cash flows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%.

Accepted Answer

The payback period is the time it takes for the project to recover its initial investment. In this case, the project recovers $50,000 annually for the first 10 years, totaling $500,000, which exceeds the initial cost of $400,000. Therefore, the payback period is within the first 8 years.

Quiz 9: Net Present Value and Other Investment Criteria