(500,000 - 217,391 - 189,036)/164,379 = 93,573/164,379 = 0.569
The discount payback period is 2.6 years.
DIF:
M
REF:
8.3 Payback Methods
NAR: Gamma Electronics
5.
If Gamma Electronics has a 15% cost of capital, what’s the NPV of the investment?
a.
$213,745
b.
$185,865
c.
$713,745
d.
$500,000
ANS: A
NPV = -500,000 + 250,000/1.15 + 250,000/1.15
2
+ 250,000/1.15
3
+ 250,000/1.15
4
= 213,745
DIF:
E
REF:
8.4 Net Present Value
NAR: Gamma Electronics
6.
If Gamma Electronics has a 15% cost of capital, what’s the IRR of the investment?
a.
23.4%
b.
15.0%
c.
34.9%
d.
100.0%
ANS: C
Let r represent the IRR of the investment.
-500,000 + 250,000/(1+r) + 250,000/(1+r)
2
+ 250,000/(1+r)
3
+ 250,000/(1+r)
4
= 0
r = 34.9%
DIF:
E
REF:
8.5 Internal Rate of Return
NAR: Gamma Electronics
7.
If Gamma Electronics has a 15% cost of capital, what’s the profitability index of the investment?
a.
1.4
b.
0.4
c.
2.0
d.
1.0
ANS: A
(250,000/1.15 + 250,000/1.15
2
+ 250,000/1.15
3
+ 250,000/1.15
4
)/500,000 = 713,745/500,000 = 1.4
DIF:
E
REF:
8.6 Profitability IndexNAR:
Gamma Electronics
NARRBEGIN: Exhibit 8-1 Invst Csh Prj
Exhibit 8-1
The cash flows associated with an investment project are as follows:
Cash Flows
Initial Outflow
-$70,000
Year 1
$20,000
Year 2
$30,000
Year 3
$30,000
Year 4
$30,000
NARREND