Professional Documents
Culture Documents
REG# 1535103
Strategic Finance
Assignment- Capital Budgeting
Q.1 An investment project provides cash inflows of $585 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 $4,900?
Answer
(a) If the initial cost is $1,700, the payback period is:Payback = 2 + ($530 /
$585) =2.91 years.
(b) For the $3,300 cost, the payback period is: Payback = $3,300 / $585
=5.64 years
(c) The initial cost is $4, 900, Payback = $4,900 / $585 = 8.38 years
Q.2 An investment project costs $10,000 and has annual cash flows of $2,900 for
six years. What is the discounted payback period if the discount rate is zero
percent? What if the discount rate is 5%? If it is 19%?
Q.3 A firm evaluates all of its projects by applying the IRR rule. If the required return
is 14%, should the firm accept the following project?
Answer
IRR for this project is: 0 = $28,000 + $12,000 / (1 + IRR) + $15,000 / (1 +
IRR)2+ $11,000 / (1 + IRR)3
IRR = 17.18% Since the IRR is greater than the required return, we would
accept the project
Q.4 Slow Ride Corp. is evaluating a project with the following cash flows:-
The company uses an 11% discount rate and 8% re-investment rate on all of its
projects. Calculate the MIRR of the project using these interest rates.
Answer
MIRR = 20.44%
Reinvestment approach