Quiz 4/1

Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9% and required payback is 4 years. When is the IRR rule unreliable?

IRR rule is unrealiable when projects have unconventional cash flows (postive and negative cash flows in the following years)

Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9% and required payback is 4 years. Should we accept the project?

Since the project is having a negative NPV and an IRR lower than required return, the should not be accepted

Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9% and required payback is 4 years. What is the payback period?

The Cumulative cash flow is 0 in year 4. Therefore, the payback period = 4 years Initial Investment / Annual Cash Inflow = $100,000/$25,000 = 4 Years

Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9% and required payback is 4 years. What is the IRR?

The IRR of the poject is 7.93% which is less than the required retur of 9%. Hence the project should be rejected CF0 = -$100,000; C01 = $25,000; F01 = 5; Press IRR; then CPT,

Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9% and required payback is 4 years. What is the NPV?

The NPV is -$2,758.72 (Negative) showing the project is not profitable CF0 = -$100,000; C01 = $25,000; F01 = 5; Press NPV, Enter I = 9%; then CPT,

Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9% and required payback is 4 years. What decision rule should be the primary decision method?

The Net Present Value (NPV) is the primary decesion maker