 # Finance Questions

## Question

Calculating payback: What is the payback period for the following set of cash flows?
Year                Cash flow
0                      -\$6,400
1                         1,600
2                         1,900
3                         2,300
4                         1,400
Calculating payback: Buy Coastal, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the flowing two projects available, should it accept either of them?
Year          Cash flow (A)            Cash flow (B)
0                   -\$40,000                  -\$60,000
1                      19,000                     14,000
2                      25,000                     17,000
3                      18,000                     24,000
4                      6,000                     270,000
Calculating Discounted Payback: An investment project costs\$15,000 and has annual cash flows of \$4,300 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5 percent? If it is 19 percent?
Calculating IRR: A firm evaluates all of its projects by applying the IRR rule. If the required return is 16 percent, should the firm accept the following project?
Year         Cash flow
0               -\$34,000
1                  16,000
2                  18,000
3                  15,000
Calculating NPV: For the cash flows in the previous problem, what is the NPV at a discount rate of zero percent? What if the discount rate is 10 percent? If it is 20 percent? If it is 30 Percent?
Calculating Profitability Index: What is the profitability index for the flowing set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent?
Year            Cash flow
0                  -\$14,000
1                      7,300
2                      6,900
3                      5,700

## Solution Preview

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1. The payback period is 4 years. After three years the inflows total to only \$5,800 (=\$1,600 + \$1,900+\$2,300) but after four years the inflows total to \$7,200 (=\$5,800 + \$1,400) which then exceeds the initial cash outflow of \$6,400....
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