Finance

2886 Words Jun 9th, 2016 12 Pages
Spring 2011, test 3, question 9, version 4, modified by adding IRR & NPV 1. The following table presents information on a potential project with conventional cash flows currently being evaluated by SDA. Which of the statements are true? Expected cash flows (number of years from today) | Cost of capital | 0 | 1 | 2 | 3 | 4 | | -60,000 | 28,000 | 18,000 | 35,000 | 9,000 | 14.0% |
Statement 1: SDA would accept the project based on the project’s payback period and the payback rule if the payback threshold is 2.25 years
Statement 2: SDA would accept the project based on the project’s discounted payback period and the discounted payback rule if the discounted payback threshold is 2.85 years
Statement 3: SDA would accept the
…show more content…
Statement 1 is false and statement 2 is true D. Statement 1 is false and statement 2 is false

Spring 2011, test 3, question 9, version 4, modified by adding IRR & NPV 1. The following table presents information on a potential project with conventional cash flows currently being evaluated by SDA. Which of the statements are true? Expected cash flows (number of years from today) | Cost of capital | 0 | 1 | 2 | 3 | 4 | | -60,000 | 28,000 | 18,000 | 35,000 | 9,000 | 14.0% |
Statement 1: SDA would accept the project based on the project’s payback period and the payback rule if the payback threshold is 2.25 years
Statement 2: SDA would accept the project based on the project’s discounted payback period and the discounted payback rule if the discounted payback threshold is 2.85 years
Statement 3: SDA would accept the project based on the project’s NPV and the NPV rule
Statement 4: SDA would accept the project based on the project’s IRR and the IRR rule

Payback: statement 1 is false
Assume expected cash flows occur uniformly throughout the year Year | Expected CF | Expected CF needed after year-end | 0 | -60,000 | 60,000 | 1 | 28,000 | 60,000 – 28,000 = 32,000 | 2 | 18,000 | 32,000 – 18,000 = 14,000 | 3 | 35,000 | 14,000 – 35,000 = -21,000 | 4 | 9,000 | |
Payback occurs between 2 and 3 years
After 2 years, 14,000 in expected cash flows are needed
In year 3, the expected cash flow is $35,000
Therefore, it would take ($14,000

More about Finance

Open Document