Corporate Finance

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Financial Management Assignment (10 Sep, 2012)
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Ch. 5: 1 (a-e), 4, 5, 7, 10, 11, 12, 15
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FM1 Takumi KAWAI, Pham NGUYEN, Yang CHEN, Bi CHAO
#1

a. What is the payback period on each of the following projects? Payback period: A 3 years, B 2 years, C 3years

b. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? “B” Only B meetsthe given cutoff period.
c. If you use a cutoff period of three years, which projects would you accept? “A, B, C” All the projects meet the given cutoff period, thus, every project (A, B, C) is acceptable. (In terms of NPV, since B has the highest NPV, B is the best option.)

d. If the opportunity cost of capital is 10%, which projects have positive NPVs?

“B & C” have the positive NPV at the capital cost of 10%.

e.“If a firm uses a single cutoff period for all projects, it is likely to accept too many short- lived projects.” True or false?

“False” Assuming the definition of “short-lived projects” is “projects with short period of cash flow”, since the concept of payoff period doesn’t consider the cash flow after the payoff, the single cutoff period doesn’t block the long-lived projects (the projects generating long period of cash flow).

#4
You have the chance to participate in a project that produces the following cash flows:The internal rate of return is 13%. If the opportunity cost of capital is 10%, would you accept the offer? Since the internal rate of return is greater than the opportunity cost of capital, there is NO point of accepting this project.

#5
Consider a project with the following cash flows:
a. How many internal rates of return does this project have?

b. Which of the following numbers is the project IRR: 
(i) -50%; (ii) -12%; (iii) +5%; (iv)+50%? As calculated in problem “a”, the project IRRs are (i) -50% &(iv)+50%. c. The...
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