92. Consider an investment with an initial cost of $20,000 and is that expected to last for 5 years. The expected cash flows in years 1 and 2 are $5,000, in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the payback period in years. A. 3.18 yearsB.3.82 yearsC. 4.00 yearsD. 4.55 yearsE. None of the abovePayback Period = ($5,000 + $5,000 + $5,500 = $15,500 for 3 years; remainder $20,000 - $15,500 = 4,500. $4,500/$5,500 = .81818 = .82) = Payback Period = 3.82 yearsDifficulty level: MediumTopic: PAYBACKType: PROBLEMS93. An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years. If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted payback period is _____ years. A. 3B. 3.2C.3.75D. 4E. 5Discounted Payback: n = $15,000/$5,000 = 3. PMT = 1 PV = -3 FV = 0 I/YR = 10 N = ? = 3.75Difficulty level: MediumTopic: DISCOUNTED PAYBACKType: PROBLEMS5-81

Chapter 05 - Net Present Value and Other Investment Rules94. An investment project has the cash flow stream of $-250, $75, $125, $100, and $50. The cost of capital is 12%. What is the discounted payback period? A. 3.15 yearsB.3.38 yearsC. 3.45 yearsD. 3.60 yearsE. 4.05 years$75/1.12 = $66.96, $125/1.12 = $99.65, $100/1.12 = $71.18, $50/1.12 = $31.783 yr. CF: $250 - $66.96 - $99.65 - $71.18 = $12.21 Fraction = $12.21/$31.78 = .38Discounted Payback: 3 + .38 = 3.38 yearsDifficulty level: MediumTopic: DISCOUNTED PAYBACKType: PROBLEMS95. An investment cost $10,000 with expected cash flows of $3,000 for 5 years. The discount rate is 15.2382%. The NPV is ___ and the IRR is ___ for the project. A.$0; 15.2382%B. $3.33; 27.2242%C. $5,000; 0%D. Can not answer without one or the other value as input.E. None of the above.NPV = $-10,000 + (3,000 x PVIFA 5,.152382) = $0Difficulty level: EasyTopic: NET PRESENT VALUE AND INTERNAL RATE OF RETURNType: PROBLEMSEssay Questions5-82

Chapter 05 - Net Present Value and Other Investment Rules96. List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR) rule. The advantages of the rule are its close relationship with NPV and the ease with which it is understood and communicated. The two disadvantages are that there may be multiple solutions and the rule may lead to a ranking conflict in evaluating mutually exclusive investments. The student should add a brief explanation demonstrating their understanding of each.Topic: INTERNAL RATE OF RETURNType: ESSAYS97. Explain the differences and similarities between net present value (NPV) and the profitability index (PI). The NPV and PI are basically the same calculation, and both rules lead to the same accept/reject decision. The main difference between the two is that the PI may be useful in determining which projects to accept if funds are limited; however, the PI may lead to incorrect decisions in considering mutually exclusive investments.Topic: NPV VS. PIType: ESSAYS98. Given the goal of maximization of firm value and shareholder wealth, we have stressed the importance of net present value (NPV). And yet, many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR). Why do you think this is the case?