07-credit-quiz-7

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Studocu is not sponsored or endorsed by any college or university 07 Credit Quiz 7 Overview of Corporate Finance (Athabasca University) Studocu is not sponsored or endorsed by any college or university 07 Credit Quiz 7 Overview of Corporate Finance (Athabasca University) Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Correct Mark 1.00 out of 1.00 Using a payback period rule tends to bias investors toward Reference: textbook page 303 The correct answer is: shorter-term investments. Select one: a. riskier investments. b. less risky investments. c. longer-term investments. d. shorter-term investments. e. lower return investments. Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Correct Mark 1.00 out of 1.00 Project Phoenix costs $1.25 million and yields annual cost savings of $300,000 for seven years. The assets involved in the project can be salvaged for $100,000 at the end of the project. Ignoring taxes, what is the payback period for Project Phoenix? Your answer is correct. CF0 = –$1,250,000 CF1 = $300,000 Ending Balance at time 1 = –$1,250,000 +$300,000 = –$950,000 CF2 = $300,000 Ending Balance at time 2 = –$950,000 + $300,000 = –$650,000 CF3 = $300,000 Ending Balance at time 3 = –$650,000 + $300,000 = –$350,000 CF4 = $300,000 Ending Balance at time 4 = –$350,000 + $300,000 = –$50,000 CF5 = $300,000 Ending Balance at time 5 = –$50,000 + $300,000 = $250,000 Payback occurs between time 4 and time 5. The fraction of year is 50,000 / 300,000 = 0.166666667 year x 12 months/year = 2 months Select one: a. 4 years b. 4 years and 1.7 months c. 4 years and 2 months d. 4 years and 3 months e. 5 years Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Therefore, payback period = 4 years + 2 months. The correct answer is: 4 years and 2 months Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Correct Mark 1.00 out of 1.00 Fargo Inc. is considering a project that will require an initial investment of $1.5 million. The project will provide incremental cash inflows of $600,000 for the next five years. If the required return on the project is 15%, what is its discounted payback? If the company’s investment cutoff threshold is three years, should the project be given the go-ahead? CF0 = $1,500,000 CF1 = $600,000 PV(CF1) = $600,000 / 1.15 = $521,739.1304 Ending PV balance at time 1 = –$1,500,000 + $521,739.1304 = –$978,260.87 CF2 = $600,000 PV(CF2) = $600,000 / 1.15^2 = $453,686.2004 Ending PV balance at time 2 = –$978,260.87 + $453,686.2004 = –$524,574.669 CF3 = $600,000 PV(CF3) = $600,000 / 1.15^3 = $394,509.7395 Ending PV balance at time 3 = –$524,574.669 + $394,509.7395 = –$130,064.9297 CF4 = $600,000 PV(CF4) = $600,000 / 1.15^4 = $343,051.9474 Ending PV balance at time 4 = –$130,064.9297 + $343,051.9474 = $212,987.0177 Discounted payback occurs between time 3 and time 4. The fraction of year is calculated as $130,064.9297 / $343,051.9474 = 0.379140625 years x 12 months/year = 4.549687 months Select one: a. 3 years and 4.55 months; yes b. 3 years and 4.55 months; no c. 4 years and 11.55 months; yes d. 4 years and 11.55 months; no e. 5 years and 1 month; no Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

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