MAhmed 2355 13293 1%2FAssignment Capital Budgeting

Asad Mahmood REG# 1535103 Strategic Finance

Assignment- Capital Bdgeting Q.1 An investment project provides cash infows o $585 per year or eight years. What is the project payback period i the initia cost is $1!"## What i the initia cost is $%!%## What i it is $&!'## Answer

(a) * the initia cost is $1!"##! the payback period is+,ayback -  / ($5%# 0 $585) -!"1 $ears" (b) or the $%!%## cost! the payback period is+ ,ayback - $%!%## 0 $585 -5"%& $ears (c) 2he initia cost is $&! '##! ,ayback ,ayback - $&!'## 0 $585 - '"3' $ears Q. An investment project costs $1#!### and has ann3a cash fows o $!'## or si4 years. What is the disco3nted disco3nted payback period i the disco3nt rate is ero percent What i the disco3nt rate is 56 * it is 1'6

(a)7 - #6+% / ($1!%## 0 $!'##) - %.&5 years isco3nted payback - 7eg3ar payback -3"&5 $ears (b)7 - 56+$!'## 0 1.#5 / $!'## 0 1.#5/ $!'## 0 1.#5%$"!8'".&$!'## $"!8'".&$!'## 0 1.#5&- $!%85.8& isco3nted payback - % / ($1#!### 9 "!8'".&) 0 $!%85.8& - 3"'' $ears (c)7 - 1'6+ $!'## Q.% A :rm eva3ates a o its projects by appying the *77 r3e. * the re;3ired ret3rn is 1&6! sho3d the :rm accept the oowing project  
Answer

=ash fow ($8!###) 1!### 15!### 11!###

*77 or this project is+ # - 9 $8!### / $1!### 0 (1 / *77) / $15!### 0 (1 / *77)/ $11!### 0 (1 / *77)% *77 - 1".186 >ince the *77 is greater than the re;3ired ret3rn! we wo3d accept the project

Q.& >ow 7ide =orp. is eva3ating a project with the oowing cash fows+?  
=ash fow ($'!###) 11!## 1%!'## 15!8## 1!'## ('!&##)

 2he company 3ses an 116 disco3nt rate and 86 re?investment rate on a o its projects. =ac3ate the @*77 o the project 3sing these interest rates. Answer  2ime # cash fow - 9$'!'## 9 $'!&## 0 1.11 5  2ime # cash fow - 9$%5!&"8.&& @*77 3sing the disco3nting approach is+ # - 9$%5!&"8.&& / $11!## 0 (1 / @*77) / $1%!'## 0 (1 / @*77)  / $15!8## 0 (1 / @*77) % / $1!'## 0 (1 / @*77)& @*77 - #.&&6 7einvestment approach  2ime 5 cash fow - $11!##(1.#8)& / $1%!'##(1.#8) % / $15!8## (1.#8)  / $1!'## (1.#8) 9 $'!&## 2ime 5 cash fow - $55!"#8.5' @*77 3sing the disco3nting approach is+ # - 9$'!'## / $55!"#8.5'0 (1 / @*77) 5 $55!"#8.5'0 $'!'## - (1 / @*77) 5 @*77 - ($55!"#8.5' 0 $'!'##) 105 9 1 @*77 #.1&%! or 1&.%6