Question

                                                       Capital Budgeting Questions

1. Net income= 29 depreciation expense = 10 , salary expense = 7 . Find net cash flow

2. Investment cost= 300 , annual net cash flows= 30 , annual net income=25 . Find the payback period

3. Annual flows:

Year 1= 200

Year 2= 300

Year 3= 400

Year 4= 500

     Investment cost=700 . Find the payback period

4. Investment cost= 800. Salvage value = 400 . Find average cost.

5. Average cost= 500, annual net income= 100; annual net cash flow= 200

Find annual return.

Answer 1

Net Cash Flow:

Net Cash Flow

= Net Income + Depreciation Expense

= 29 + 10

= 39

Payback Period:

Payback Period

= Investment Cost / Annual Net Cash Flows

= 300 / 30

= 10

Payback Period of uneven cash flows:

Investment Cost = 700

Year	Cash Flow	Cumulative Cash Flow
Year 1	200	200
Year 2	300	500
Year 3	400	900
Year 4	500	1400

Payback Period

= 2 years +((700-500)/(900-500))

= 2 + (200/400)

= 2 + 0.5

= 2.5 years

Average Cost:

Average Cost

= Investment Cost – Salvage Value

= 800 – 400

= 400

Annual Return:

Annual Return

= Annual Net Cash flow / Average Cost

= 200 / 500

= 40%