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Finance Assignment Question 6

  1. Hong Kong Inc., imposes a payback cutoff of three years for its projects. If the company has the following two projects available, should it accept either of them? Assume cash flows occur evenly throughout the years.

Year

Cash Flow (A)

Cash Flow (B)

0

-$30,000

-$50,000

1

20,000

11,000

2

23,000

15,000

3

18,000

24,000

4

6,000

270,000

  1. A project has annual cash inflows of $4,200, $5,300, $6,100, and $7,400 for the next four years, respectively and a discount rate of 10 percent. What is the discounted payback period for these cash flows if the initial cost is $6,500? What if it is $12,900? Assume cash flows occur evenly throughout the years.
  1. For the below cash flows, 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 25 percent?

Year

Cash Flow

0

-$32,000

1

16,000

2

20,000

3

17,000

  1. Taiwan, Inc., has identified the following two mutually exclusive projects:

Year

Cash Flow (A)

Cash Flow (B)

0

-$42,400

-$43,700

1

21,400

6,400

2

18,500

14,700

3

13,800

22,800

4

7,600

25,200

  1. What is the IRR for each of these projects? You may use Excel function IRR to do the calculations. Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct (no explanation required)?
  2. 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?
  1. What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 22 percent? Should we accept the project if discount rate is 22%?

Year

Cash Flow

0

-$15,100

1

7,600

2

6,800

3

6,900