FF Qs & As Topic 4 Part 1 - FEEDBACK FORUM TOPIC 4...

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Unformatted text preview: FEEDBACK FORUM TOPIC 4 PART 1 CAPITAL BUDGETING Question 1 Two projects are said to be ----------------- if the acceptance of one does not affect the acceptance of the other. a) Independent b) Mutually exclusive c) Correlated d) Co-varying i) Independent Projects – cash-flows of one project are not affected by acceptance of another project – e.g. we can choose both Project A and Project B ii) Mutually Exclusive – acceptance of one project rules out acceptance of another project e.g. If we choose Project A we cannot also choose Project B 1 Question 2 The payback period rule: a) Discounts cash flows b) Determines a cut-off point so that all projects accepted by the NPV rule will be accepted by the payback period rule c) Varies the cut-off point with the interest rate d) Requires an arbitrary choice of a cut-off point Payback Period – non-discounted cash-flow method Payback Period Rule – the amount of time required for an investment to generate net cash-flows to cover the initial cost of the investment i.e how long does it take for a project to generate sufficient net cash-flows to cover the initial cost of the project? Payback Period Rule Application: Payback Period set at 3 years – therefore, any project that takes longer than 3 years to cover its initial cost will be ruled out by the payback period rule 2 Question 3 What is the payback if the initial investment is $60,000 and the cash flows are: Year 1 $20,000 Year 2 $25,000 Year 3 $30,000 Year 4 $10,000 Year 5 $ 5,000 a) 1.75 years b) 2.25 Years c) 2.45 Years d) 2.50 Years Year Net Cash-Flow ($) Accumulated NCF ($) (60,000) (60,000) 1 20,000 (40,000) 2 25,000 (15,000) 3 30,000 15,000 Payback occurs sometime between the end of Year 2 and the end of Year 3. At the end of Year 2 $15,000 is still to be paid back, and in Year 3 $30,000 is paid back, and since $15,000 is half of $30,000, payback occurs half way through Year 3. Therefore, the payback period is 2.5 years....
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This note was uploaded on 04/24/2011 for the course BAFI 1012 taught by Professor Michaelgangemi during the Three '10 term at Royal Melbourne Institute of Technology.

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FF Qs & As Topic 4 Part 1 - FEEDBACK FORUM TOPIC 4...

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