Transcript
PRACTICE QUESTIONS ON STRATEGIC DECISIONS XYZ Company is considering investing in a project that requires an initial investment of $100,000 for some machinery. There will be net inflows of $20,000 for the first two years, $10,000 in years three and four, and $30,000 in year five. Find the accounting rate of return for the machine. There are two projects of $100,000 each which are expected to generate the following cash inflows in six years: PROJECT A PROJECT B Year 1: $20,000 $80000 Year 2: $15,000 $10000 Year 3: $30,000 $5000 Year 4: $35,000 $5000 Year 5: $30,000 $10000 Year 6: $25,000 $15000 Required: Compute payback period of the PROJECTS. Should the investment be made if management wants to recover the initial investment in 4 years or less? Which project you will choose and why? 3)Year Project 2 Project 3 0 initial investment -110,000 -100,000 1 inflows 35,000 35,000 2 ‘ 35,000 35,000 3 ‘ 30,000 20,000 4 ‘ 25,000 25,000 5 ‘ 25,000 25,000 Calculate Payback Period for two projects. 4) Two project requires an initial investment of $200,000 each and are expected to generate the following net cash inflows: PROJECT A PROJECT B Year 1: $95,000 60,000 Year 2: $80,000 60,000 Year 3: $60,000 80,000 Year 4: $55,000 30,000 Year 5: $60,000 30,000 Required: Compute net present value and Profitability Index of the projects and rank the projects if the minimum desired rate of return is 10%.
