21. A firm can earn the cost of capital on any cash-inflows by: A) Selling stock
ID: 2792918 • Letter: 2
Question
21. A firm can earn the cost of capital on any cash-inflows by: A) Selling stock and bonds B) Buying back the firm's bonds and stock C) Increasing fixed or variable costs D) Reducing fixed costs E) Reducing total variable costs 22. Determine the Internal Rate of Return (IRR) of a project that costs $1,000 today and has a single cash inflow of $1,610.51 occurring at the end of five years. A)996 B) 10% C) 1196 D) 12% E)13% 23. Determine the Internal Rate of Return (IRR) of a project that costs $1,000 today and has a single cash inflow of $1,120 occurring at the end of one year. A) 9% B)10% C)1196 D)1296 E)13% 24. Determine the Net Present Value of a project that costs $1,000 today and has a single cash inflow of $1,367.63 occurring at the end of three years if the cost of capital is 11%. A) Zero B) S6 C)S17 D)$22 E) $33Explanation / Answer
22) Answer is C, 11%
Workings :
Average Cash Inflow per annum= 1610.51/5= 322.102
F= I/C = 1000/322.102= 3.10461
where F= Factor
I= Original Investment
C= Average Cash Inflow per annum
As per annuity table 3.10 comes as 11%
23) Answer is D,12%
Workings: Using the same formula given in quetion 22
F=1000/1120= 0.89286
As per annuity table 0.8929 comes as 12%
24) Answer is A, Zero
Discount factor @ 11% end of 3 years 0.73119
Present value of cash inflows = 0.73119*1367.63=999.999
less:Initial investment 1000
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Difference 0.00
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Cash Inflow at the end of 5 years= 1610.51Average Cash Inflow per annum= 1610.51/5= 322.102
F= I/C = 1000/322.102= 3.10461
where F= Factor
I= Original Investment
C= Average Cash Inflow per annum
As per annuity table 3.10 comes as 11%
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