QUESTION 1

A four-year project has an initial outlay of $100,000. The future cash inflows from its project are $50,000 for years one and two and $40,000 for years three and four. Given a discount rate of 10%, will the project be accepted?APPLY THE NPV APPROACH.

QUESTION 2

APPLY THE PAYBACK METHOD AND DISCOUNTED PAYBACK. SHOULD THE PROJECT BE ACCEPTED OR REJECTED?

PROJECT INFORMATION:

INITIAL CASH OUTLAY = $520,000

CASH INFLOWS:

YEAR 1 = 100,000

YEAR 2 = 250,000

YEAR 3 = 150,000

YEAR 4 = 350,000

REQUIRED RATE OF RETURN = 10%

PAYBACK CUT-OFF = 3 YEARS

QUESTION 3

Based on the profitability index (PI) rule, should a project with the following cash flows be accepted if the discount rate is 8 %? Why or why not?

Year

Cash Flow

0

-$18,600

1

$10,000

2

$7,300

3

$3,700