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

Chapter 7_7 to 7_8
Download Document
Showing pages : 1 of 2
This preview has blurred sections. Sign up to view the full version! View Full Document
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
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Create a FREE account now to get started. Log In

The email address you entered is not valid. The email address you provided is already in use.
Your username must be at least 5 characters. Your username must consist of only alphanumeric characters. Your username must contain at least one letter. Your username contains inappropriate language. Another user has already claimed this username.
Your password must be at least 6 characters in length.
{[ $select.selected.label ]} Please select a valid school.
By creating an account you agree to our Privacy Policy, Terms of Use, and Honor Code.
Create my FREE account Processing...
Sign Up with Facebook

We will never post anything without your permission.

Already on Course Hero? Log In