Question
1. State the accepting or rejecting criterion for NPV and IRR techniques. What you understand by mutually exclusive and independent projects? Explain in your words.
1. State the accepting or rejecting criterion for NPV and IRR techniques. What you understand by mutually exclusive and independent projects? Explain in your words.
2. A firm is considering investing in a project with the following cash flows: Pointsin time (yearly intervals)
0
1
2
3
4
Project A
-180,000
50,000
60,000
70,000
80,000
cost of capital is 10 per cent.
Required:
a) Calculate the internal rateof return (IRR) (1.5 marks)
For project A: try 15% and 16%
b) Calculate the net present value (NPV) for each project. (1 mark)
3. Happiness Company is considering a major investment project. The initial outlay of OMR 400,000 will, in subsequent years, be followed by positive cash flows, as shown below. Year
1
2
3
4
Cash Flow
150,000
150,000
150,000
150,000
After the end of the fourth year this business activity will cease and no more cash flows will be produced. The initial OMR 400,000 investment in plant and machinery is to be depreciated over the four-year life of the project using the straight-line method. These assets will have no value after Year 4. The management judge that the cash inflows shown above are also an accurate estimation of the profit before depreciation for each of the years. They also believe that the appropriate discount rate to use for the firms projects is 10 per cent per annum.
a. Calculate the payback period (0.5 Marks) b. Calculate an accounting rate of return (Using Annual Basis). (2 Marks)
Pointsin time (yearly intervals) | 0 | 1 | 2 | 3 | 4 |
Project A | -180,000 | 50,000 | 60,000 | 70,000 | 80,000 |
cost of capital is 10 per cent.
Required:
a) Calculate the internal rateof return (IRR) (1.5 marks)
For project A: try 15% and 16%
b) Calculate the net present value (NPV) for each project. (1 mark)
Year | 1 | 2 | 3 | 4 |
Cash Flow | 150,000 | 150,000 | 150,000 | 150,000 |
After the end of the fourth year this business activity will cease and no more cash flows will be produced. The initial OMR 400,000 investment in plant and machinery is to be depreciated over the four-year life of the project using the straight-line method. These assets will have no value after Year 4. The management judge that the cash inflows shown above are also an accurate estimation of the profit before depreciation for each of the years. They also believe that the appropriate discount rate to use for the firms projects is 10 per cent per annum.
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