1. The payback period for a project is often calculated and then a decision about undertaking the project is made after comparing this calculated payback period to a target payback period. Select all characteristics that apply to the target payback period.

The target payback period:

A	is a number calculated as a fixed percentage of the life of the project.
B	is irrelevant if the payback period for the project is less than three years.
C	can be expressed as a range of acceptable periods.
D	is usually determined by management.

2. Select all the statements that correctly describe the process of capital budgeting:

	the analysis should take into account the time value of money
	decisions should be made based on the company's goal of wealth maximisation
	future cash flows rather than future accounting profits should be analysed
	the analysis should take into account the risk of the project
	all sunk costs associated with the project should be included in the analysis

3. You are the director of a company and you are considering updating all of your computers to new models. Using the old computers you have net cash flows of $64,662 per year and it is estimated that with the new computers net cash flows would grow to $86,647 per year. Updating all of the computers would initially cost $77,982. The estimated remaining life of the old computers is 1 year and the expected lifetime of the new computers is 4 years. The scrap value of the old computers is estimated to be $9,699 irrespective of whether they are scrapped today or in 1 year. The new computers have an estimated scrap value at the end of their life of $10,669.

Management is considering two different options:

• Option 1: Use the old computers for 1 more year and then replace them with the new computers that will then be replaced every 4 years in perpetuity.
• Option 2: Replace the old computers with the new computers now and replace them every 4 years in perpetuity.

The company's required rate of return is 15.6% pa. Assume that the cost of the computers, the cash flows that they generate and their scrap value remain constant over time.

a)What is the net present value of option 1? Give your answer in dollars to the nearest dollar.

NPV = $

b)What is the net present value of option 2? Give your answer in dollars to the nearest dollar.

NPV = $

c)Which option will you undertake?

	Option 1:	Use the old computers for 1 more year and then replace them with the new computers that will then be replaced every 4 years in perpetuity.
	Option 2:	Replace the old computers with the new computers now and replace them every 4 years in perpetuity.

- 4. A large stake in an Alpacca farming business can be purchased for $96,380. The Alpacca farm is expected to return $2,000 in perpetuity per month in arrears. The required rate of return on investments of this risk is j₁₂ = 25%.

a)What is the investment's net present value? Give your answer in dollars and cents to the nearest cent.

NPV = $

b)What is the internal rate of return (IRR)? Give your answer as a nominal percentage per annum to 3 decimal places.

IRR = % pa