Exercises (Capital Expenditure Evaluation)

Question 1
Project A: Initial Expenditure €20,000
Expected annual cashflow amounts over the asset’s life:

Year Cashflow (€)

1 5000
2 7000
3 7000
4 7000
5 7000

Project B: Initial Expenditure €30,000

Expected annual cashflow amounts over the asset’s life:

Year Cashflow (€)

1 8000
2 8000
3 8000
4 8000
5 8000

(a) Using simple payback, which of the above projects are financially viable?
(b) If funding is available only for one of the projects, which one should be selected?

Question 2
Project A: Initial Expenditure €120,000
Expected annual cashflow over the asset’s life:

Year Cashflow (€)

1 60,000
2 65,000
3 65,000
4 60,000
5 50,000

Project B: Initial Expenditure €130,000

Expected annual cashflow over the asset’s life:

Year Cashflow (€)

1 50,000
2 65,000
3 70,000
4 60,000
5 60,000

(a) Using discounted payback, with a discount rate of 12% p.a., which of the above projects
are financially viable?
(b) If funding is available only for one of the projects, which one should be selected?
 Question 3

(a) Using the same projects and the same discount rate as in question 2 above, calculate the
Net Present Values (NPV) of both projects.
(b) Which of the projects are financially viable?
(c) If funding is available for only one of the projects, which one should be selected?

Question 4

Initial Expenditure: €120,000

Year Cash Flow (€)

1 35,000
2 40,000
3 40,000
4 35,000
5 30,000

Find the internal rate of return (IRR) of the above project. For a positive NPV use a 12% discount
rate; for a negative NPV use a 20% discount rate.