The payback peniod of an investnsent is best desenbed as a the number of years r

Question

The payback peniod of an investnsent is best desenbed as a the number of years required for cunsulative profits from a progoct to eagsal the in b the number of years required for the cumulative cash flows from a progect to cqnal the wtsal outhay e the number of years roquired for the cumolative cash flows froms a progect to eqaal the avcrage eqpal the initial ontlay investment in the project, when depreciation is coursisderced d a period of tume sufficient to earm a rate of roturn equal to thc fn's cost of capital ANSWER 12. If a net present valuc analysis for a normal project gives an NPv greater than aero, an inicmal rate of returm calculation on the same project would yield an internal rate of rcturn of retun for the fim lhe reqaired rate greater than b less than c cqual to d cannot be determined from the information given ANSWER 13. The risk-free rate of return is 5.5 pereent, which includes an expected inflation premium of 2 5 percent The expected return on the market is 12.8 percent. What is the required rate of return for Envoy's common stock, which carries a beta of 1.357 a7.0% b 164% c. 15.4% ®. 128% ANSWER 14 The risk premium in Problem #15 above is: 12 8% b, 9996 C. 55% d 154% ANSWER IS. A-Z's new IBM mainframe machine costs $30,000 with is expected useful life of 10 years and a one- time installation expense of S1000. The machine will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value at the end of the period. 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, dctermine the annual net cash flows generated by the mainframe machine is a $4,500 b $3,940 c S5,700 d $3,900 ANSWER

Explanation / Answer

11… Payback period of an investment is best described as: b.the no.of years reqd. for cumulative cash flows from a project to equal the initial outlay. 12. a. Greater than the reqd. rate of return, ie the cost of capital Because at IRR , NPV=0 13.. Real risk-free rate=(1+nominal risk-free Rate)/(1+Inflation Rate)-1 ie. ((1+0.055)/(1+0.025))-1= 2.9268% Reqd. Return= RFR+(beta*(Market risk premium) Reqd. Return=2.93%+(1.35*(12.8%-2.93%)) 16.26% ANSWER: b-- 16.4% 14… (12.8%-2.93%) 9.9% 15… ANSWER: d. $ 3900 Annual cash flows generated Costs savings 4500   ; Less: tax on additional income due to this savings 4500*40%=1800 ; Add: Depreciation tax shield ($ 30000/10 Yrs. )*40%=1200 = 3900

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