FIN20150 Lecture Notes - Lecture 15: Net Present Value, Payback Period, Discounted Cash Flow

45 views3 pages

sangriacoyote110

22 Jan 2016

School

Department

Finance

Course

FIN20150

Professor

Ackermann Carl

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Ch 9- npv and investing shares cost o o. Net present value is a way of seeing effect of investment on the price of. Net present vales-difference between an investment"s market value and its o. Discounted cash flow valuation- estimate future cash flows you expect to produce, npv= pv of future cash flows - cost of investment. Net present value rule- accept if the npv is pos, reject if neg. Payback period- the amount of time required for an investment to generate cash flows sufficient to recover its initial cost. Payback pd rule- if payback period is less than a specific number of years, accept investment. No discounting involved- no time value of money. Discounted payback period-time until sum of discounted cash flows=initial. Discounted payback rule- investment acceptable of its discounted payback is less than a set number of years. If project ever pays back on a discounted basis, has positive npv.

Related Questions

QUESTION 1

You purchased land 3 years ago for $60000 and believe its market value is now $90000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $150000, an expense that you plan to depreciate straight line over the next three years. Wells Fargo offered you a loan for $60,000 at an 8% interest rate to be repaid over the next 4 years. You anticipate that the hotel will earn revenues of $165000 each year, while expenses will be a mere $30000 each year. The initial working capital requirement will be $7000 which will be recovered in the last year. The tax rate is 35%. Your estimated cost of capital is 10%. What is the net present value of this project?

$24,918.55

$20,000.38

$38,020.13

$45,200.80

$33,869.93

10 points

QUESTION 2

The NPV rule states that you should accept an investment if the NPV:

is negative.

is positive.

is less than or equal to zero.

is less than the investment's initial cost.

exceeds the investment's initial cost.

5 points

QUESTION 3

The payback period is the period of time it takes an investment to generate sufficient cash flows to:

		earn the required rate of return.
		produce the required net income.
		produce a yield equal to or greater than the market rate on similar investments.
		have a cash inflow, rather than an outflow, for the year.
		recover the investment's initial cost.

5 points

QUESTION 4

A proposed project will increase a firm's accounts payables. This increase:

		should be ignored when conducting scenario analysis.
		is a cash outflow at time zero.
		is an initial cash inflow only.
		is a sunk cost and should be ignored.
		is a cash inflow at time zero and a cash outflow at the end of the project.

5 points

QUESTION 5

What is the net present value of a project with the following cash flows if the discount rate is 7 percent?

Year 0: $-3500

Year 1: $1200

Year 2: $1000

Year 3: $900

Year 4: $0

-$1,112.30

$305.75

-$770.40

$2,007.99

$946.31

10 points

QUESTION 6

The change in a firm's future cash flows that results from adding a new project are referred to as _____ cash flows.

eroded

deviated

incremental

direct

residual

carminebeetle1

Please answer the following questions:

1. Cost of capital can best be defined as:

a. compensation demanded by the investor of a firm before taxes and transaction costs are considered

b. compensation demanded by the investor of a firm after taxes and transaction costs are considered

c. compensation demanded by the investor of a firm before taxes only are considered

d. compensation demanded by the investor of a firm before taxes, transaction costs, and interest expense are considered

2. The after tax cost of debt on a 9% $200,000 loan given a 30% tax bracket would be:

a. 9%

b. 6.3%

c. 5%

d. 4%

3. Treasury bills are currently yielding 3.5%, the expected market return is 10%, and the firmâs beta is 1.50. Calculate the cost of capital for this firm according to the CAPM. a. 9.75%

b. 13.25%

c. 6.25%

d. 0.0625%

4. The payback period is best defined as:

a. the time it takes to receive cash flows sufficient to cover your initial investment

b. the time period required for total revenue received to equal the initial investment

c. the time period required for the present value of all cash flows to equal the initial investment

d. the time period required for the NPV to equal zero

5. A problem associated with the payback method is:

a. it usually requires less time to compute than that required by the net present value method

b. it doesnât consider cash flows after the payback period

c. it assumes that all cash flows are invested at the cost of capital

d. it uses the time value of money concept

maroonduck208

Problem 1

All Techniques- Decision among mutually exclusive investments. Pound industries is attempting to select the best of three mutually exclusive projects. The initial investment and after tax cash inflows associated with these projects are shown in the following table

Cash flow Project A Project B Project C

Initial investment (CF) $80,000 $110,000 $110,000

Cash inflows (CF), T=1 to 5 $25,000 $37,000 $38,500

Calculate the payback period for each project

Calculate the net present value (NPV) of each project, assuming that the fimrm has a cost of capital equal to 11%

Calculate the internal rate of return (IRR) for each project

Indicate which project you would recommend

A-the payback period of project A is ___years

the payback period of project B is ___years

the payback period of project C is ___years

B-the NPV of project A is $____

the NPV of project B is $____

the NPV of project C is $____

C- The IRR of project A is _____

The IRR of project B is _____

The IRR of project C is _____

D- which project would you recommend?

Project A

Project B

Project C

Problem 2

IRR, investment life, and cash inflows Oak enterprise accepts projects earning more than the firms 15% cost of capital. Oak is currently considering a 10 year project that provides annual cash inflows of $50,000 and requires an initial investment of $328,300

Deter the IRR of the project is it acceptable

Assuming that the cash inflos continue to be $50,000 per year how many additional years would the flows have to continue to make the project acceptable (that is, to make it have an IRR of 15%?

A. the project IRR is ___%

Is the project acceptable?

Yes or no

B. assuming that the cash inflows continue to be $50,000 per year the number of additional years the flows would have to continue to make the project acceptable at the 15% discount rate is ____ additional years

C) with the given life, initial investment and cost of capital the minimum annual cash inflow that the firm should accept is $______

greyswan843

FIN20150 Lecture Notes - Lecture 15: Net Present Value, Payback Period, Discounted Cash Flow

Document Summary

Get access

Related Documents

FIN20150 Chapter 9: Chapter 9

FIN20150 Chapter Notes - Chapter 10: Operating Cash Flow, Income Statement, Net Present Value

FIN20150 Lecture Notes - Lecture 12: Net Present Value, United States Treasury Security, Efficient-Market Hypothesis

Related Questions

		is negative.
		is positive.
		is less than or equal to zero.
		is less than the investment's initial cost.
		exceeds the investment's initial cost.

		$24,918.55
		$20,000.38
		$38,020.13
		$45,200.80
		$33,869.93

		-$1,112.30
		$305.75
		-$770.40
		$2,007.99
		$946.31

		eroded
		deviated
		incremental
		direct
		residual