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Payback period, discounted payback, NPV, IRR

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Question 1
Assume you have just been promoted junior financial manager of a company. You are very smart and are planning to be promoted in the next 2-2.5 years. An associate of your company shows you a project with the following cash flows.

End of Year Cash Flows
0 -$100,000
1 $40,000
2 $40,000
3 $40,000
4 $40,000
5 -$20,000
6 $80,000

a) Compute the payback period of this project.

b) Compute the discounted payback period of this project assuming a discount rate of 5%.

c) Would you accept this project? Explain.

d) Compute the NPV of the project. Is this a good project?

e) Would you use the IRR as evaluation technique for this project? Explain.

Quest 2
A project has the following cash flows:

End of Year Cash Flows
0 -150,000
1 60,000
2 60,000
3 60,000
4 60,000
5 60,000
6 -50,000
7 -50,000
8 -50,000
9 -50,000
10 -50,000
A) Compute the NPV of the project assuming a discount rate of 0%
B) Compute the NPV of the project assuming a discount rate of 8.02%
C) Interpret the results in a) and b)
D)If this project's risk adjusted discount rate is 6% should the project be accepted? Explain

Question 3

The "golden rule" in capital budgeting is to select a project if the NPV of the project is positive. Would you accept a project with a negative NPV? Explain

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Solution Summary

Questions on capital budgeting involving calculations for payback period, discounted payback, NPV have been answered.

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