IC50006 Finance, Investment and Banking Week 2 Practice Exercise
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Finance, Investment and Banking (IC50006)
Week 2 Practice Exercise
1: A project will cost £100,000, have a 3-year life and a scrap value of £10,000. Depreciation is charged on a straight line basis and annual profits will be £40,000 before depreciation. Calculate the ARR using all three.
2: Entrepreneur Ltd has calculated the following net cash flows for a project costing £1,450,000:
Year
1
2
3
4
5
Calculate the
£000
230
370
600
420
110
(i) Payback period (to the nearest month)
(ii) Advise the company whether to accept the project if the company's cost of capital is 10%.
3: Consider the following four-year project. The initial cost is £1,000,000. The future after- tax cash inflows for years 1, 2, 3 and 4 are: £400,000, £300,000, £200,000 and £200,000, respectively. What is the payback period?
4: Poe Ltd is considering whether to undertake the following projects where Projects B and C are mutually exclusive and Project A is independent. The projected cash flows for each project are:
Year |
A |
B |
C |
0 |
(20,000) |
(20,000) |
(20,000) |
1 |
12,000 |
16,000 |
10,000 |
2 |
14,000 |
8,000 |
14,000 |
(i) Calculate the NPV of projects A, B and C and also calculate the NPV of projects A and B together and A and C together, using an 8% discount rate.
(ii) Repeat (i) but use a discount rate of 15%. Comment on your results.
5: Dweller, Inc. is considering a four-year project that has an initial cost of £80,000. The future cash inflows from its project are £40,000, £40,000, £30,000 and £30,000 for years 1, 2, 3 and 4, respectively. Dweller uses the net present value method and has a discount rate of 12%. Will Dweller accept the project?
6: Calculate the net present value of a project which requires an initial investment of £243,000 and it is expected to generate a net cash flow of £50,000 each year for the next five years. Assume that the salvage value of the project is zero. The target rate of return is 12% per annum.
7: An initial investment of £8,320 thousand on plant and machinery is expected to generate net cash flows of £3,411 thousand, £4,070 thousand, £5,824 thousand and £2,065 thousand at the end of first, second, third and fourth year respectively. At the end of the fourth year, the machinery will be sold for £900 thousand. Calculate the net present value of the investment if the discount rate is 18%. Round your answer to nearest thousand dollars.
8: Discuss advantages and disadvantages of Net Present Value?
9: Company C is planning to undertake a project requiring initial investment of £105 million. The project is expected to generate £25 million per year in net cash flows for 7 years. Calculate the payback period of the project.
10: Company C is planning to undertake another project requiring initial investment of £50 million and is expected to generate £10 million net cash flow in Year 1, £13 million in Year 2, £16 million in year 3, £19 million in Year 4 and £22 million in Year 5. Calculate the payback value of the project.
11: Discuss the advantages and disadvantages of Payback period?
12: An initial investment of $130,000 is expected to generate annual cash inflow of $32,000 for 6 years. Depreciation is allowed on the straight line basis. It is estimated that the project will generate scrap value of $10,500 at end of the 6th year. Calculate its accounting rate of return assuming that there are no other expenses on the project.
13: Discuss the advantages and disadvantages of ARR?
2022-12-05