Title: Calculating Payback, IRR, NPV, and OCF

Page 292

1. Calculating payback. What is the payback period for the following set of cash flows?

Year                        Cash Flow

0                            -$6,400

1                             1,600

2                             1,900

3                             2,300

4                             1,400

Page 293

7. Calculating IRR. A firm evaluates all of its projects by applying the IRR rule. If the required return is 16 percent, should the firm accept the following project?

Year                        Cash Flow

0                              -$34,000

1                               16,000

2                               18,000

3                               15,000

8. Calculating NPV. For the cash flow in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return (RR) was 30 percent?

9. Calculating NPV and IRR. A project that provides annual cash flows of $28,500 for nine years costs $138,000 today. Is this a good project if the required return is 8 percent? What if it’s 20 percent? At what discount rate would you be indifferent accepting the project and rejecting it?

Page 328 (4)

Calculating OCF: Consider the following income statement:

Sales                               $824,500

Costs                                538,900

Depreciation                      126,500

EBIT                                 159,100

Taxes (34%)                       54,094

 Net income                       105,006

 Fill in the missing numbers and then calculate the OCF. What is the depreciation tax shield?

 The above questions are from the below text:

Ross, S., Westerfield, R., & Jordan, B. (2012). Fundamentals of corporate finance.

Boston, MA: McGraw-Hill/Irwin.

Number of words: 745 (approximately 2.5 pages)