If I had a net investment of $40,000 with cash inflows amounting to $20,000 per

Question

If I had a net investment of $40,000 with cash inflows amounting to $20,000 per year for three years (years 1-3) what would be the discounted payback on the project if the cost of capital is 10%? If I had a cutoff of two years in discounted payback, would I accept this project? (Points : 3)       1.35 years; accept
      1.95 years; reject
      2.35 years; reject
      exactly 3 years; reject

8. Time Turman, Inc., is considering a drill press costing $30,000 and is expected to have a 10 year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm's cash operating costs by $4,500 per year. If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press. (Points : 3)       $4,500
      $900
      $5,700
      $3,900

9. What is the NPV of an investment if the initial outlay is $50,000 and the cash inflows are:

Year   CF
1         $19,048
2         $18,141
3         $17,277
4         $16,454

Assume a cost of capital of exactly 9.524%. (Points : 3)       $7,100
      $23,000
      $4,500
      $6,432

10. Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9000.The equipment's $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project. (Points : 3)       $32,000
      $27,000
      $24,000
      $18,000


If I had a net investment of $40,000 with cash inflows amounting to $20,000 per year for three years (years 1-3) what would be the discounted payback on the project if the cost of capital is 10%? If I had a cutoff of two years in discounted payback, would I accept this project? (Points : 3)       1.35 years; accept
      1.95 years; reject
      2.35 years; reject
      exactly 3 years; reject

Explanation / Answer

Hi,

Please find the answers as follows:

7)

Payback Period = 2 Years + (40000 - 18182 - 16529)/15026 = 2.35 Years

Option C (2.35 years; reject) is correct.

8)

Annual Net Cash Inflows = (4500 - 30000/10)*(1-.40) + 30000/10 = 3900

Option D (3900) is correct.

9)

NPV = -50000 + 19048/(1+.09524) + 18141/(1+.09524)^2 + 17277/(1+.09524)^3 + 16454/(1+.09524)^4 = 7100

Option A (7100) is correct.

10)

Before Tax Cash Flow from Operations = 40000 - 29000 = 11000

+ Cash Generated from Sale of Equipment = 9000

Total Taxable Income = 20000

After Tax Cash Inflow = 20000*(1-.40) = 12000

+ Recovery of Working Capital = 7000 + 5000

Net Cash Flow in the 10th Year = 12000 + 7000 + 5000 = 24000

Option C (24000) is correct.

Thanks.

Annual Cash Inflows Discounted Cash Inflows 20000 18182 20000 16529 20000 15026

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