Questions 42 - 44 concern the investment described below. Project X has a requir
ID: 2753482 • Letter: Q
Question
Questions 42 - 44 concern the investment described below.
Project X has a required return of 15% and initial after tax cost is $5,000,000. It is expected to provide after tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4.
42) The investment's payback period is:
A) 1.3 years B) 2.8 years C) 3.8 years D) 4.3 years
43) The investment's internal rate of return is:
A) 6.4% B) 8.9% C) 10.5% D) 14.6%
44) The investment's net present value is:
A) $4,800,000 B) $2,600,000 C) $1,100,000 D) -$420,000
Explanation / Answer
The payback happens after year 2 but before year 3
Payback period = previous year + cash flow required to cover initial cost/ cashflow for preceeding year
= 2years + 1300000/1700000 = 2.76 `2.8 years (B)
43) At IRR, PV of inflows = PV of ouflows
So. 1800000/(1+r) + 1900000/(1+r)^2 + 1700000/1+r)^3 + 1300000/(1+r)^4 = 5000000
R = 14%
NPV =
PV of inflows - PV of ouflows
Year Cashflow Cumulative cashflow 0 -5000000 -5000000 1 1800000 -3200000 2 1900000 -1300000 3 1700000 400000 4 1300000 1700000Related Questions
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