HADM 2250 Prelim Review Questions

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1. What is the payback period for the set of cash flows given below?

Year Cash Flow

0 –$5,500

1 1,300

2 1,500

3 1,900

4 1,400

2. An investment project provides cash inflows of $585 per year for eight years.

(a) What is the project payback period if the initial cost is $1,700? (b) What is the project payback period if the initial cost is $3,300? (c) What is the project payback period if the initial cost is $4,900?

3. Buy Coastal, Inc., imposes a payback cutoff of three years for its international investment projects.

Year Cash Flow (A) Cash Flow (B)

0 –$60,000 –$70,000

1 23,000
*…show more content…*

Year Cash Flow

0 –$18,000

1 10,300

2 9,200

3 5,700 (a) What is the profitability index for the set of cash flows if the relevant discount rate is 10%? (b) What is the profitability index for the set of cash flows if the relevant discount rate is 15%? (c) What is the profitability index for the set of cash flows if the relevant discount rate is 22%?

12. The Angry Bird Corporation is trying to choose between the following two mutually exclusive design projects:

Year Cash Flow (I) Cash Flow (II)

0 –$64,000 –$18,000

1 31,000 9,700

2 31,000 9,700

3 31,000 9,700

(a) If the required return is 10 percent, what is the profitability index for both projects? If the company applies the profitability index decision rule, which project should the firm accept?

(b) What is the NPV for both projects? If the company applies the NPV decision rule, which project should it take?

13. An investment has an installed cost of $527,800. The cash flows over the four-year life of the investment are projected to be $221,850, $238,450, $205,110, and $153,820.

(a) If the discount rate is zero, what is the NPV?

(b) If the discount rate is infinite, what is the NPV?

(c) At what discount rate is the NPV just equal to zero?

14. Consider the project with the following cash flows

Year Cash Flow

0 –$3,024

1 17,172

2 –36,420

3 34,200

4 –12,000

This problem is useful for testing the ability of financial calculators and computer software.

(a) How many

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