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Corporate Finance
Faculty of Sciences
Department of Management Sciences and Economics
Mid Semester (Fall 2023) Examination
Question no 1 (05)
1. Explain the concept of Net Present Value (NPV) in capital budgeting. What does a positive
NPV indicate?
2. Compare and contrast the Payback Period and Net Present Value (NPV) as capital budgeting
techniques. Highlight their respective advantages .
3. Define the Internal Rate of Return (IRR) and explain its significance in evaluating investment
projects.
4. How does the concept of time value of money relate to capital budgeting decisions,
particularly in the context of Net Present Value (NPV)?
5. Discuss a situation where the Net Present Value (NPV) and Internal Rate of Return (IRR) may
provide conflicting investment decisions. How would you resolve such a scenario?
Question no 2 (10)
a) You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive
$20,000 at the end of each year for the 30 years between retirement and death (a psychic told you
would die after 30 years). You know that you will be able to earn 11% per year during the 30-year
retirement period. How large a fund will you need when you retire in 20 years to provide the 30-year,
$20,000 retirement annuity?
b) How much will you need today as a single amount to provide the fund calculated in part a if you
earn only 9% per year during the 20 years preceding retirement?
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Question no 3 (10)
A metal Manufacturing Company is attempting to choose the better of two mutually exclusive
projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are
shown in the following table:
1 $34000 $50000
2 34000 40000
3 34000 30000
4 34000 25000
5 34000 20000
a. Payback period, Net present value (NPV), and Internal rate of return (IRR) of both the
projects (IRR for Project A try at 15.05%, 18.08%) (IRR for Project B try at 13.65%, 21.65%)
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