SixPracticeQsForPCMofMPM1StudentsSZABIST

Q1.TwoinvestmentproposalsinvolvingsameCOFofUS$210,000ineachcaseason01012013;
EndofYearCIFATCashInflowsafterTaxinUS$
2013 2014 2015 2016 2017 2018
Choice1 $50,000 $40,000 $40,000 $50,000 $30,000 $35,000

Choice2 US$65,000eachyearfornext5Year.

a. FindPayBackPeriodforbothchoices.
b. WhichChoiceisbetterandinwhatcircumstances?

Q2. C&Cohasfollowinginvestmentproposals,

01012013 At End of AtEndof At End of At End of
COF 2014 2015 2016 2017
CIFAT CIFAT CIFAT CIFAT
ChoiceX $(20,500) 10,500 6,500 8,000
Nil
ChoiceY $(50,500) 35,500 5,500 7,500 5,000

a. FindNetPresentValueforabovechoicesatDiscountRate10%.
b. FindProfitabilityIndexforabovechoicesatDiscountRate12%.
c. Whichchoicedoyoupreferandwhy?

Q3:
D a project manager is evaluating two mutually exclusive project proposals (X and Y) with the
followingEndofYearAnnualCashFlow;

Year. NetCFsProjectX. NetCFsProjectY.
2013 $100,000 $150,000
2014 $40,300 $75,200
2015 $50,400 $59,300
2016 $35,500 $65,400

Required:Indicatewhichprojectisacceptablebasedonfollowingcapitalbudgetingtechniques;

a.Paybackperiodofprojects .
b.NPVofprojectsUsing10%RRR.
e.PI(BenefitCostAnalysis)ofprojectsUsing10%RRR.
g.IRR(Internalrateofreturn)ofProjects.

ByM.ShoaibNaqashbandiSZABISTApril2013. Page1
 SixPracticeQsForPCMofMPM1StudentsSZABIST

Q4:
W Engineering is considering including two pieces of equipment, a truck and an overhead pulley
system,inthisyearscapitalbudget.Theprojectsareindependent.Thecashoutlayforthetruckis$17,100,
andthatforthePulleysystemis$22,430today.Aftertaxcashflowsatendofeachyearareasfollows;

YEAR TRUCK PULLEY
1 $5,100 $7,000
2 5,100 7,100
3 5,100 7,200
4 5,100 7,300
5 5,100 7,400

Required: Indicatethecorrectaccept/rejectdecisionforeachusingfollowingcapitalbudgetingtechniques;

a) NPVofprojectsifRRRis14%.
b) PI(BenefitCostAnalysis)ofprojectsifRRRis14%.
c) IRR(Internalrateofreturn)ofProjects.

Q5:
In Capital budgetingNPVmethod is the famousonewhich relies on discountedcashflow(DCF)technique.
The project manager in Delta Engineering has received two proposals for a machine he may want to
purchase.Usingthefollowingdataaboutthemachine,whatishismosteconomicalcourseofaction?
Data MachineA MachineB

Life 3years 5years
InitialCost(COF) $110,000 $160,000

AnnualBenefit(CIF) $85,000 $92,000
AnnualCost(COF) $22,000 $35,000

Give your recommendations based on NPV method for each project, and indicate the correct accept/reject
decisionforeach.Therequiredrateofreturn(costofcapital)is14%.

Q6:
Your company is considering two mutually exclusive (only one could be selected) projects X and Y, whose
costsandcashflowsareshownbelow:

YEAR X Y
0 ($1,000) ($1,000)
1 100 200
2 300 600
3 400 500
4 700 300

Theprojectsareequallyrisky,andtheircostofcapitalis16percent.Youmustmakearecommendationbased
ontheIRR.

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ByM.ShoaibNaqashbandiSZABISTApril2013. Page2