Chapter 9 (1, 2, 4, 6, 8, 11, 17)

Q1. What is the payback period for the following set of cash flows?
Year Cash Flow
0 -$8,300
1 2,100
2 3,000
3 2,300
4 1,700

Q2. An investment project provides cash inflows of $745 per year for eight years. What is the
project payback period if the initial cost is $1,700? What if the initial cost is $3,300? What if
it is $6,100?

Q4. An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300 for
the next four years, respectively, and a discount rate is 11 percent. What is the discounted
payback period for these cash flows if the initial cost is $5,200? What if the initial cost is
$6,400? What if it is $10,400?

Q6. You are trying to determine whether to expand your business by building a new
manufacturing plant. The plant has an installation cost of $13.5 million, which will be
deprecated straight-line to zero over its four-year life. If the plant has projected net income of
$1,570,000, $1,684, 200, $1,716,300 and $1,097,400 over these four years, respectively, what
is the project’s average accounting return (AAR)?

Q8. The firm has initial investment of $34,000 and the project yields $15,000 in year 1, $17,000
in year 2 and $13,000 in year 3, respectively. At a required return of 11 percent, should the
firm accept this project? What if the required return is 24 percent?

Q11. Consider the following cash flows for a project:

Year Cash Flow
0 -$15,400
1 7,300
2 9,100
3 5,900
What is the NVP at a discount rate of zero percent? What if the discount rate is 10 percent? If
it is 20 percent? If it is 30 percent?
Q17. Consider the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0 -$364,000 -$52,000
1 46,000 25,000
2 68,000 22,000
3 68,000 21,500
4 458,000 17,500
Whichever project you choose, if any, you require a return of 11 percent on your investment.
a. If you apply the payback criterion, which investment will you choose? Why?
b. If you apply the discounted payback criterion, which investment will you choose? Why?
c. If you apply the NVP criterion, which investment will you choose? Why?
d. If you apply the IRR criterion, which investment will you choose? Why?
e. If you apply the profitability index criterion, which investment will you choose? Why?
f. Based on your answers in (a) through (e), which project will you finally choose? Why?