BF3326 – Corporate Finance

Tutorial Questions
Lecture 5 – Investment Appraisal

Answer ALL Questions

1. What is the payback period for the following set of cash flows?

Year Cash Flow

0 -4,800
1 1,500
2 2,600
3 2,900
4 1,700

2. An investment project provides cash inflows of $860 per year for eight years. What is the project
payback period if the initial cost is $3,000? What if the initial cost is $5,000? What if it is $7,000?

3. Ehsan Ltd is trying to determine whether to expand their business by opening a new branch. The
branch has a renovation cost of $18 million, which will be depreciated straight-line to zero over its
four-year life. If the branch has projected net income of $1,632,000, $2,106,500, $1,941,700, and
$1,298,000 over these four years, what is the project’s average accounting return (AAR)?

4. Executive Load Ltd evaluates all its projects by applying the IRR rule. If the required return is 18
percent, should the firm accept the following project? On the other hand, 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 was 30 percent?

Year Cash Flow

0 -30,000
1 13,000
2 19,000
3 12,000

5. 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 15 percent? If it is 22 percent?

Year Cash Flow

0 -12,000
1 6,200
2 5,600
3 3,900

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BF3326 – Corporate Finance
Tutorial Questions
Lecture 5 – Investment Appraisal

6. The Complex Mind Ltd is trying to choose between the following two mutually exclusive expansion
projects. If the required return is 10 percent and the company apply the profitability index decision
rule, which project should the firm accept? If the company applies the NPV decision rule, which
project should it take? Explain why your answers are different in using profitability index and NPV.

Year Cash Flow A Cash Flow B

0 -40,000 -12,000
1 18,000 6,100
2 18,000 6,100
3 18,000 6,100

7. Dedicated Toolers Lts is considering a project that has the following cash flow and WACC data. What
is the project's NPV? Should The company accept the project?

WACC: 9.00%

Year 0 1 2 3

Cash flows -$1,000 $500 $500 $500

8. Malika Construction Ltd is considering a project that has the following cash flow data. What is the
project's IRR? Should the project be accepted?

Year 0 1 2 3

Cash flows -$1,000 $425 $425 $425

9. Healthy Eating Ltd is considering a project that has the following cash flow data. What is the project's
payback? If the company evaluation is based on 2 years payback, would this project be rejected?

Year 0 1 2 3

Cash flows -$350 $200 $200 $200

10. Team Success Ltd is considering a project that has the following cash flow data. What is the project's
payback?

Year 0 1 2 3 4 5

Cash flows -$1,100 $300 $310 $320 $330 $340

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BF3326 – Corporate Finance
Tutorial Questions
Lecture 5 – Investment Appraisal

11. Micro Management Ltd is considering Projects S and L, whose cash flows are shown below. These
projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing
the project with the higher IRR, how much value will be forgone?

WACC: 10.00%

Year 0 1 2 3 4

CFS -$1,025 $650 $450 $250 $50

CFL -$1,025 $100 $300 $500 $700

12. Interesting Outlook Corp is considering Projects X and Z, whose cash flows are shown below. These
projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by
choosing the project with the higher IRR, how much value will be forgone?

WACC: 7.75%

Year 0 1 2 3 4

CFX -$1,050 $675 $650

CFZ -$1,050 $360 $360 $360 $360

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