CAPITAL BUDGETING CLASS QUESTION

(The information below is for question 1 & 2)

Toya Motors needs a new machine for production of its 2005 models. The financial vice president has appointed you to do the capital budgeting analysis. You have identified two different machines that are capable of performing the job. You have completed the cash flow analysis, and the expected net cash flows are as follows:

Expected Net Cash Flow Year Machine B Machine O 0 ($5,000) ($5,000) 1 2,085 0 2 2,085 0 3 2,085 0 4 2,085 9,677

1. What is the payback period for Machine B?

a. 1.0 year b. 2.0 years c. 2.4 years d. 2.6 years e. 3.0 years

2. If the required rate of return is 14% for both machines, according to the NPV rule, which machine would you invest in?

(The information below is for question 3 - 5)

The director of capital budgeting for Giant Inc. has identified two mutually exclusive projects, L and S, with the following expected net cash flows:

Expected Net Cash Flows Year Project L Project S 0 ($100) ($100) 1 10 70 2 60 50 3 80 20

Both projects have a required rate of return of 10 percent.

3. What is the payback period for Project S?

a. 1.6 years b. 1.8 years c. 2.1 years d. 2.5 years e. 2.8 years

4. What is Project L’s NPV?

a. $50.00 b. $34.25 c. $22.64 d. $18.78 e. $10.06

5. What is Project L’s IRR?

a. 16.6% b. 19.7% c. 21.4% d. 23.6% e. 24.2%

6. A project offers the following after-tax cash inflows and has an NPV of $117 at a 10 percent required rate of return.

Year Cash Flow 1 $400 2 300 3 400 4 300

What initial investment outlay (CF0) does this project require?

a. $900 b. $1,000 c. $1,100 d. $1,200 e. $1,300