BUSINESS FINANCE教学资料 Chapter 8_Solutions.docxVIP

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BUSINESS FINANCE教学资料 Chapter 8_Solutions.docx

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Chapter 8: NPV and other investment criteriaCalculating Payback [LO2]?Koop Kust NV imposes a payback cut-off of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?Year Cash flow (A) (€)Cash flow (B) (€)0 ?50,000 ?60,000 1 9,000 24,000 2 35,000 7,000 3 18,000 24,000 4 6,000 270,000 Answer:Project A has cumulated cash flows of €44,000 in Year 2, so the cash flows are short by €6,000 of recapturing the initial investment, so the payback for Project A is:Payback = 2 + (€6,000 / €18,000) = 2.33 yearsProject B has cash flows of:Cash flows = €24,000 + 7,000 + 24,000 = €55,000during this first three years. The cash flows are still short by €5,000 of recapturing the initial investment, so the payback for Project B is:B:Payback = 3 + (€5,000 / €270,000) = 3.019 yearsUsing the payback criterion and a cutoff of 3 years, accept project A and reject project B.Calculating Discounted Payback [LO3]?An investment project has annual cash inflows of €4,200, €5,300, €6,100 and €7,400, and a discount rate of 14 per cent. What is the discounted payback period for these cash flows if the initial cost is €7,000? What if the initial cost is €10,000? What if it is €13,000?Answer: When we use discounted payback, we need to find the value of all cash flows today. The value today of the project cash flows for the first four years is:Value today of Year 1 cash flow = €4,200/1.14 = €3,684.21Value today of Year 2 cash flow = €5,300/1.142 = €4,078.18Value today of Year 3 cash flow = €6,100/1.143 = €4,117.33Value today of Year 4 cash flow = €7,400/1.144 = €4,381.39To find the discounted payback, we use these values to find the payback period. The discounted first year cash flow is €3,684.21, so the discounted payback for a €7,000 initial cost is: Discounted payback = 1 + (€7,000 – 3,684.21)/€4,078.18 = 1.81 yearsFor an initial cost of €10,000, the discounted payback is:Discounted payback = 2 + (€10,000 – 3,68