Question 1:

You are considering a project that will require an initial outlay of $200,000. This project has an expected life of four years and will generate after-tax cash flows to the company as a whole of $60,000 at the end of each year over its five-year life. Thus, the free cash flows associated with this project look like this:

Year Free Cash Flow ($)

0 -200,000

1 70,000

2 70,000

3 70,000

4 70,000

Given a required rate of return of 10% percent, calculate the following:

1. Discounted payback period
2. Net present value
3. Profitability index

Question 2:

You purchase equipment for $5,000. You expect to sell the equipment for $1,000. When you are done with it in 5 years, the company's marginal tax rate is 40%. What is the depreciation expense for each year and the after-tax salvage in year 5 if the straight-line method is adopted?

Question 3:

Which of the following statement is true about the Net Present Value decision rule?

A. If the NPV is negative, reject the project

B. A positive NPV means the project will increase the wealth of the owners

C. If there is a conflict result between NPV and IRR, always follow IRR

D NPV rule take into consideration of the time value of money