# 1.41 Review Questions: Chapter One

Review Questions: Chapter One

1. You are given the following data. Calculate the Payback.

Initial Cost= \$12,500

CF1= \$7,500                      CF5= \$4,750

CF2= \$6,275                      CF6= \$4,650

CF3= \$4,000                      CF7= \$ 2,150

CF4= \$4,850                      CF8=\$ 0

2. What problems can you cite with respect to the use of the Payback method?

3. Assuming a 2% discount rate, what is the Discounted Payback – from the prior question?

4. What problems can you cite with respect to the use of the Discounted Payback method?

5. Assuming a 3% discount rate, what is the Net Present Value?

6. What problems can you cite with respect to the use of the Net Present Value method?

7. Assuming a 4% Discount Rate, what is the Profitability Index, given the following?

Initial Cost = \$22,545

CF1= \$7,500                      CF5= \$4,750

CF2= \$6,275                     CF6=\$4,650

CF3= \$4,000                      CF7=\$2,150

CF4=\$4,850                       CF8=\$0

8. Assuming a 4% Reinvestment Rate, what is the project’s Modified Internal Rate of Return?

9. What problem(s) pertain with regard to two projects’ disparate relative Scales?

10. You are given the following data. Calculate the project’s Internal Rate of Return.

Initial Cost= \$13,621.80               CF1-15 = \$2,000

11. Try to make up an IRR problem using Uneven Cash Flows.

12. State the rules of thumb for all the above Capital Budgeting Decision-making methods.

13. We have not, in this review, dealt with the risk of the Future Cash Flow projections. They most likely will not come in as projected. How do you propose that that issue be dealt with?

14. Do the projected numbers tell the whole story? Why or why not?

15. Can you make up another chapter question not included above?