Seminar .docx - MN0490 Week 2 Seminar Questions 1 What is the payback period for the following set of cash flows Year Cash flow(R 0 6,400 1 1,600 2

Seminar .docx - MN0490 Week 2 Seminar Questions 1 What is...

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MN0490, Week 2, Seminar Questions 1. What is the payback period for the following set of cash flows? Year Cash flow (R) 0 6,400 1 1,600 2 1,900 3 2,300 4 1,400 2. Koop Kust NV imposes a payback cut-off of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Year Cash flow (A) (€) Cash flow (B) (€) 0 50,000 60,000 1 9,000 24,000 2 35,000 7,000 3 18,000 24,000 4 6,000 270,000 3. You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of £15 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of £1,938,200, £2,201,600, £1,876,000 and £1,329,500 over these four years, what is the project’s average accounting return (AAR)?
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4. A firm evaluates all of its projects by applying the IRR rule. If the required return is 20 per cent, should the firm accept the following project? Year Cash flow (€) 0
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Unformatted text preview: 30,000 1 15,000 2 17,000 3 14,000 5. A project that provides annual cash flows of €28,500 for nine years costs €138,000 today. Is this a good project if the required return is 8 per cent? What if it’s 20 per cent? At what discount rate would you be indifferent between accepting the project and rejecting it? 6. The following problem is common in the automobile industry. You are required to assess the viability of two new car lines. Your company cannot afford to undertake both projects and must choose one only. The appropriate discount rate is 12 percent for this investment. Assume the cash flows occur at the end of the period. Year People Carrier SUV €200,000 €500,000 1 300,000 300,000 2 100,000 250,000 3 100,000 250,000 a. Based on the payback period, which project should be taken? b. Based on the NPV, which project should be taken? c. Based on the IRR, which project should be taken? d. Based on this analysis, is incremental IRR analysis necessary? If yes, please conduct the analysis....
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