Page1 / 2

Chapter 7_7 to 7_8 - ActSc 371 7.7 and 7.8 Practice...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Chapter 7_7 to 7_8

Chapter 7_7 to 7_8 - ActSc 371 7.7 and 7.8 Practice...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
ActSc 371 7.7 and 7.8 Practice Problems 1. What is the profitability index for the following cash flows, if the relevant discount rate is 15%? Year 0 $-10,000 Year 1 $6,500 Year 2 $4,000 Year 3 $2,500 A) 1 B) 1.03 C) 1.3 D) 1.05 E) 1.11 Solution: PV of cash flows after the initial investment is: 10,320.54. The PI is this value divided by the absolute value of the original investment This is 10320.54/10000=1.03 2. The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life, will produce a cashflow of $1,200 in the first and second year, and $3,000 in the third year. The interest rate is 12%. Calculate the project's discounted payback and Profitability Index assuming end of year cash flows. Should the project be taken? Solution: CF0=-4300 CF1=1200 CF2=1200 CF3=3000 Step 1: Calculate the NPV using the calculator = -136.60 Because NPV is less than zero, discounted payback cannot be calculated. Step 2: to calculate the PI, first calculate the NPV without including the initial cashflow (i.e. -
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.
Ask a homework question - tutors are online