You are assessing an investment project being considered for implementation. The cash flows of the project are
Question:
You are assessing an investment project being considered for implementation. The cash flows of the project are shown in the table below.
Year | cash outflow | Discount Factor | |||
0 | $ (350,000) | 1.0000 | |||
1 | 0 | 0.9259 | |||
2 | 190,000 | 0.8573 | |||
3 | 165,000 | 0.7938 | |||
4 | 120,000 | 0.7350 |
Required: Complete the table and compute,
- The Discounted Payback Period [6 marks]
- The Net Present Value [5 marks]
- The Profitability Index [3 marks]
- Would the project be accepted for implementation? State Reason [2 marks]
B. Assume you have received the following partially completed cash budget for The True Test Company. It is noted that the company has a beginning cash balance in January of $10,000, however, a minimum balance of $20,000 will be used from that point forward. The firm is able to access short-term borrowing at 12% per annum (or 1% per month)to be paid monthly. The interest on any short-term borrowing is paid in the month after it is incurred.
THE TRUE TEST COMPANY | ||||
CASH BUDGET Jan - Apr 2021 | ||||
January | February | March | April | |
$ | $ | $ | $ | |
Total cash receipts | 49,000 | 42,000 | 43,750 | 42,750 |
Total Cash Disbursement | 41,025 | 45,425 | 36,575 | 45,575 |
Net change in cash for the period | ||||
Plus Beginning cash balance | ||||
Less: Interest on short-term borrowing | ||||
Ending Cash balance before short-term borrowing | ||||
New financing needed | ||||
Ending cash balance | ||||
Cumulative Borrowing |
Required: Complete the table showing the Cash Budget for the period January thru April
[14 marks]
Corporate Finance Core Principles and Applications
ISBN: 978-1259289903
5th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan