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Exercise Chapter 3

This document contains sample problems from chapters on capital budgeting techniques in a corporate finance textbook. It includes examples calculating various metrics like payback period, discounted payback period, internal rate of return, net present value, projected income statements, operating cash flow, and using these measures to evaluate potential investment projects.

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30 views

Exercise Chapter 3

This document contains sample problems from chapters on capital budgeting techniques in a corporate finance textbook. It includes examples calculating various metrics like payback period, discounted payback period, internal rate of return, net present value, projected income statements, operating cash flow, and using these measures to evaluate potential investment projects.

Uploaded by

Phương Thảo
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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CHAPTER 3: CAPITAL BUDGETING

Chapter 9 - Net Present Value and Other Investment Criteria


(Fundamentals of Corporate Finance - Ross, Westerfield, Jordan)

1. [Payback]. What is the payback period for the following set of cash flows?
Year 0 1 2 3 4
Cash flow -6,400 1,600 1,900 2,300 1,400

2. [Payback] An investment project provides cash inflows of $765 per year for
eight years. What is the project payback period if the initial cost is $2,400?
What if the initial cost is $3,600? What if it is $6,500?

4. [Discounted Payback] An investment project has annual cash inflows of


$4,200, $5,300, $6,100, and $7,400, for the next four years, respectively. The
discount rate is 14 percent. What is the discounted payback period for these
cash flows if the initial cost is $7,000? What if the initial cost is $10,000? What
if it is $13,000?

7. [IRR] A firm evaluates all of its projects by applying the IRR rule. If the
required return is 16 percent, should the firm accept the following project?
Year 0 1 2 3
Cash flow -34,000 15,000 17,000 13,000

8. [NPV] For the cash flows in the previous problem, suppose the firm uses the
NPV decision rule. At a required return of 11 percent, should the firm accept this
project? What if the required return is 30 percent?

9. [NVP and IRR] A project that provides annual cash flows of $28,500 for nine
years costs $138,000 today. Is this a good project if the required return is 8

1
percent? What if it’s 20 percent? At what discount rate would you be indifferent
between accepting the project and rejecting it?

12. [NPV versus IRR] Bruin, Inc., has identified the following two mutually
exclusive projects:
Year Cash flow A Cash flow B
0 -43,000 -43,000
1 23,000 7,000
2 17,900 13,800
3 12,400 24,000
4 9,400 26,000

a. What is the IRR for each of these projects? Using the IRR decision
rule, which project should the company accept?
b. If the required return is 11 percent, what is the NPV for each of these
projects? Which project will the company choose if it applies the NPV decision
rule?

2
Chapter 10 – Making Capital Investment Decisions (Fundamentals of
Corporate Finance - Ross, Westerfield, Jordan)

3. [Projected Net Income] A proposed new investment has projected sales of


$830,000. Variable costs are 60 percent of sales, and fixed costs are $181,000;
depreciation is $77,000. Prepare a pro forma income statement assuming a tax
rate of 35 percent. What is the projected net income?

4. [OCF] Consider the following income statement:


Sales $747,300
Costs 582,600
Depreciation 89,300
EBIT ?
Taxes (34%) ?
Net income ?
Fill in the missing numbers and then calculate the OCF. What is the
depreciation tax shield?

5. [OCF] A proposed new project has projected sales of $108,000, costs of


$51,000, and depreciation of $6,800. The tax rate is 34 percent. Calculate
operating cash flow.

9. [Project OCF] Quad Enterprises is considering a new three-year expansion


project that requires an initial fixed asset investment of $3.9 million. The fixed
asset will be depreciated straight-line to zero over its three-year tax life, after
which time it will be worthless. The project is estimated to generate $2,650,000
in annual sales, with costs of $840,000. If the tax rate is 35 percent, what is the
OCF for this project?

10. [Project NPV] Suppose the required return on the project is 12 percent.
What is the project’s NPV?

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