This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full 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) Covarying i) Independent Projects – cashflows 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 cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule c) Varies the cutoff point with the interest rate d) Requires an arbitrary choice of a cutoff point Payback Period – nondiscounted cashflow method Payback Period Rule – the amount of time required for an investment to generate net cashflows to cover the initial cost of the investment i.e how long does it take for a project to generate sufficient net cashflows 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 CashFlow ($) Accumulated NCF ($) (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.
 Three '10
 MichaelGangemi

Click to edit the document details