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8/14/2019 Assign 1 Design Economics siap
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8/14/2019 Assign 1 Design Economics siap
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PDB 41104-Assign 1
2) A NPV of 2 zero implies that an investments
A) IRR is greater than the firms required rate of return
B) Present value of cash inflows exceeds the investments cost
C) Present value of cash inflows is positive
D) Cost exceeds the present value of its cash inflows
E) Cost is equal to the present value of its cash inflows
3) In comparing two projects using NPV profile, at the point where the net present values of the
project are equal, _________________.
A) the interest rate that makes them equal is called the crossover rate
B) the projects both have NPVs equal zero
C) the IRR of each is equal to zero
D) the IRR of each is equal to the cost of capital
E) the IRR exceed the cost of capital
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4) You are considering the following projects but you have limited funds to invest and cant take
them all. Using the profitability index, rank the projects in the order in which you would
accept them.(i.e. rank them from best to worst) Note that NONE of them are mutually
exclusive projects.
Initial investment NPVProject A RM100, 000 RM30, 000
Project B RM 80,000 RM25, 000
Project C RM 40,000 RM17, 000
Profitability Index Decision Rules
Independent Projects
Accept Project if PI 1
Mutually Exclusive Projects
Accept Highest PI 1 Project
A) A,B,C
B) B,A,C
C) C,B,A
D) B,C,A
E) A,C,B
3
Profitability index Project A
= RM100, 000 + RM30, 000
RM100, 000
= 1.3
Profitability index Project B
= RM 80,000 - RM25, 000
RM 80,000
= 1.31
Profitability index = Initial investment + NPV
Initial investment
Profitability index Project B
= RM 40,000 RM17, 000
RM 40,000
= 1.46
PI Project A = 1.3
PI Project B = 1.31
PI Project C = 1.48
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PDB 41104-Assign 1
5) ACME Sdn. Bhd. will invest RM110, 000 in a project that will produce the following cash
flows. The cost of capital is 11%. Should the project be undertaken? Give reasons.
(Note that the fourth years cash flow is negative)
Cash Flow (RM)Year 1 36,000
Year 2 44,000
Year 3 38,000
Year 4 -44,000
Year 5 81,000
Payback Period
1 st year = -110, 000 + 36, 000 = -74, 000
2nd year = -74, 000 + 44, 000 = -30, 000
3 rd year = -30, 000 + 38. 000 = 8, 000
PP of project = 2 + (110, 000 80, 000) / (118, 000 80, 000)
= 2.78 years
NPV = 36, 000 + 44,000 + 38, 000 + (-44, 000) + 81, 000 110, 000
(1.11) (1.11) (1.11) (1.11) (1.11)
= 32, 432 + 35, 711+ 27, 785 28, 984+ 48, 070 110, 000
= RM 5, 014
Profitability Index
= 110, 000 + 5, 014
110, 000
= 1.05
The project should be undertaken because:
Payback period is not to long
NPV promise a return greater than the required rate of return
The Profitability Index > 1 so the project is acceptable
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