FF Qs &amp; As Topic 4 Part 1

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

This preview shows pages 1–4. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

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....
View Full Document

## 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.

### Page1 / 16

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

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online