Name : Biruk Zewdie Mamo

1. Why it is unsound b/c Payback period is simple and fast, but economically unsound. It
ignores all cash flow after the cutoff date, it ignores the time value of money, and it
does not account for risk.
Why is it popular? It is the number of years it takes for a firm to recover its original
investment from net cash flows. The payback period of an investment is the length of
time required for the cumulative total net cash flows from the investment to equal the
total initial cash outlays. At that point in time, the investor has recovered the money
invested in the project. Merits of using Payback period
- This method uses cash flows rather than accounting profits which are more
realistic.
- Computation and usage of this method is simple and
- This method is quite important for those firms which are facing problems of
cash shortage and finance their projects throughout loans.
2. What are mutually exclusive investment projects? What is a dependent project?
Mutually exclusive projects are capital projects which compete directly with each other.
For example, if a manager has to make a choice strictly between undertaking either
project X or Y, but not both of them concurrently, then projects A and B are said to be
mutually exclusive. Project dependencies, also called task dependencies, are relationships
between tasks based on their sequence. Dependent tasks require one or more other tasks
to be completed or started before the team can start work on them.
3. A. Year Cash Flow Present Value Discount factory (15%) Present Value
0 $(700,000) 1.000 $(700,000)
1 (1,000,000) 0.870 (870,000)
2 250,000 0.756 189,000
3 300,000 0.658 197,400
4 350,000 0.572 200,200
5-10 400,000 2.164* 865,600
Net present value=$(117,800)
* PVIFA of 5.019 for 10 years minus PVIFA of 2.855 for 4 years.
* Total for years5-10.
Because the net present value is negative, the project is unacceptable.

The internal rate of return is 13.21

percent. If the trial-and-error method
were used,
we would have the following:
B. The internal rate of return is 13.21 percent. if the trial and error method were used, we
would have the following.

. The internal rate of return is 13.21

percent. If the trial-and-error method
were used,
we would have the following
Year Cash flow 14%d. factory 14%p.value 13%d. factory 13% p.value

0 $(700,000) 1.000 $(700,000) 1.000 $(700,000)

1 (1,000,000) 0.877 (877,000) 0.885 (885,000)

2 250,000 0.769 192,250 0.783 195,750

3 300,000 0.675 202,500 0.693 207,900

4 350,000 0.592 207,200 0.613 214,550

5-10 400,000 2.302 920,800 2.452 980,800

Net present value $(54,250) $14,000

*PVIFA for 10years minus PVIFA for 4 Years

*Total for 5-10

To approximate the actual rate, we interpolate between 13 and 14 Present As follows:

0.01[[0.13 $14,000]$14,000] $68250

IRR 0 =0.0021

0.14 $54250

And IRR=0.13+x=0.13+0.0021=0.01321or 13.21 percent. Because the internal rate of

return is less than the required rate of return, the project would not be acceptable.
. The internal rate of return is 13.21
percent. If the trial-and-error method
were used,
we would have the following
C. The project would be acceptable.
D. Payback period =6 years. (−$700,000 − $1,000,000 +$250,000 +$300,000 +
$350,000+$400,000 +$400,000 =0)

4.