Scribd
Upload
3K views3 pages

Capital Budgeting Practice Questions

This document contains 7 questions related to capital budgeting practices. The questions provide cash flow information for various projects and ask the reader to calculate metrics like payback period, net present value, internal rate of return, expected net present value, standard deviation, and recommend the best project based on these analyses. The questions involve comparing projects' risk levels using probability distributions of potential net present values.

Uploaded by

Mohga .F
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
3K views3 pages

Capital Budgeting Practice Questions

This document contains 7 questions related to capital budgeting practices. The questions provide cash flow information for various projects and ask the reader to calculate metrics like payback period, net present value, internal rate of return, expected net present value, standard deviation, and recommend the best project based on these analyses. The questions involve comparing projects' risk levels using probability distributions of potential net present values.

Uploaded by

Mohga .F
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
  • Capital-Budgeting Practice Questions
  • Probability in Project Selection

ITF: Capital-Budgeting-Practice Questions

Question 1
Messer’s Ltd is considering two potential projects that are Turbine and Wind
flow. The forecasted after-tax cash flows are as below:

Year Turbine (RO) Wind Flow (RO)


0 (150,000) (260,000)
1 50,000 60,000
2 50,000 70,000
3 50,000 70,000
4 50,000 90,000

If the cost of capital is 10%, calculate both projects:

i) Payback period
ii) Net present value
iii) Which project should be chosen and why.

Question 2
Oman LLC is considering two potential projects that are Real Corp and Next
Corp. The cost of capital is 8%. The annual cash flows are as below:
Year Real Next
Corp Corp
(OMR) (OMR)
0 (90,000) (90,000)
1 25000 15000
2 25000 20000
3 25000 35000
4 25000 30000
5 25000 35000

Calculate both projects using the capital budgeting techniques:

i. Payback period

ii. Net Present Value

iii. Which project should be chosen? Why?


Question 3
A company has to choose one of the following two mutually exclusive machines
using the following capital budgeting techniques. Calculate Net Present Value
(NPV) and Internal Rate of Return (IRR). The cost of capital is 10%

Year 0 1 2 3 4

Cash inflows
Machine X (20000) 8000 6000 9000 4450
Machine Y (20000) 6240 8000 4000 7000

Question 4
Which project will be selected under NPV and IRR? Cost of capital is 12%.

Cash flows at the end of


0 Year - 200,000 -300,000
1 Year 60000 40000
2 Year 50000 50000
3 Year 50000 60000
4 Year 40000 90000
5 Year 30000 100000

Question 5
Al Taqdeer LLC is considering two mutually exclusive projects Tango and Silver
Star. Project Tango costs OMR 30000 and Project Silver Star OMR 36000. You
have been given below the net present value probability distribution for each
project:

Project Tango Project Silver Star


NPV Probability NPV Probability
Estimate Estimate
(OMR) (OMR)
3000 0.1 3000 0.2
6000 0.4 6000 0.3
12000 0.4 12000 0.3
15000 0.1 15000 0.2
i. Compute the expected net present value of Projects Tango and Silver Star.

ii. Compute the risk attached to each project, i.e., Standard Deviation of each
probability distribution.

iii. Which project do you consider more risky and why?


Question 6
Muscat LLC is considering two mutually exclusive projects Foster and Edison. You have
been given in the table below the net present value probability distribution for each project:

Project Foster Project Edison


Probability NPV Probability NPV
Estimate Estimate
(RO) (RO)
0.2 4500 0.1 4500
0.3 9000 0.4 9000
0.3 18,000 0.4 18,000
0.2 22,500 0.1 22,500

i) Compute the expected net present value of Projects Foster and Edison.

ii) Compute the risk attached to each project.

ii) Which project do you consider more riskier and why?

Question 7
Mr. A is considering two mutually exclusive investment projects, from following
information select the Project on the basis of NPV and the risk attached to each
project.
Project I Project II
RO 15000 RO 15000

Cash inflow Probabilities


Probabilities
Year
1 3000 .3 4000 .1
2 4000 .2 6000 .4
3 7000 .3 7000 .3
4 6000 .2 3000 .2

You might also like