Define payback period. Explain how it can be used (5 lines).

List some advantages of payback period in capital budgeting decisions. Explain one of what you have listed (in 5 lines).

Explain (in 5 lines) one problem, pitfall, or disadvantage of using the payback.

Question Two has 40 points

2. Consider a project with a cost of $1000, with the following expected cash inflows, and a WACC of 16%.

Show your calculations by way of formulas, numerical values and if you like also by EXCEL for the following.

A. Calculate the present value of cash inflows.

B. Calculate the net present value of cash inflows.

C. Calculate the internal rate of return IRR.

D. Calculate the modified internal rate of return MIRR.

E. You will notice that IRR and MIRR are different in numerical values. Explain (in 5 lines) as to why they are different.

F. If you have to make a decision solely based on IRR or MIRR, which one would you choose and why? Explain in 5 lines.

Make sure you include your calculations by way of formulas, numerical values and if you like also by EXCEL

Question Three has 30 points

3.

A. Explain what is meant by the capital structure of an industrial firm (such as a manufacturing company). Be precise.

B. List components of the capital structure that you have defined above.

C. Are the items you have listed in part B above long term in nature (more than one year?)

D. Explain (in as much detail that you wish, including numerical analysis and graphs) the net income view or the traditional approach in regards to the relationship between the WACC and the value of the firm.

E. Explain (in 5 lines) why you would agree with the net income approach as listed in part D above.

F. Explain (in as much detail that you wish including numerical analysis and graphs) the operating income view or the neo-classical approach in regards to the relationship between the WACC and the value of the firm.

G. Explain (in 5 lines) why you would agree with the operating income or the neo-classical approach as listed in part D above.