Question

# 1. A project has an initial outlay of \$1,732. The project will generate annual cash flows...

1. A project has an initial outlay of \$1,732. The project will generate annual cash flows of \$783 over the 4-year life of the project and terminal cash flows of \$258 in the last year of the project. If the required rate of return on the project is 4%, what is the net present value (NPV) of the project? Note: Enter your answer rounded off to two decimal points. Do not enter \$ or comma in the answer box.

2.A project has an initial outlay of \$11,596. The project will generate cash flows of \$7,200 in Years 1-4. What is the profitability index (PI) of this project? Assume an interest rate of 13%.Note: Enter your answer rounded off to two decimal points.

3.ABC, Inc., has a beta of 1.19. The risk-free rate is 2.91% and the market risk premium is 7.89%. What is the required rate of return on ABC's stock?Note: Convert your answer to percentage and round off to two decimal points.

1) Statement showing NPV

 Particulars 0 1 2 3 4 NPV = Sum of PV Initial Outlay -1732 Annual cash flow 783 783 783 783 Terminal cash flow 258 Total cash flow -1732 783 783 783 1041 PVIF @ 4% 1.0000 0.9615 0.9246 0.8890 0.8548 PV -1732.00 752.88 723.93 696.08 889.85 1330.75

Thus NPV is \$1330.75

2) Statement showing PI Index

 Particulars Annual cash flow PVIF @ 13% PV 1 7200 0.8850 6371.68 2 7200 0.7831 5638.66 3 7200 0.6931 4989.96 4 7200 0.6133 4415.89 Total of PV of cash inflow -----------------------------(A) 21416.19 Total of PV of cash outflow----------------------------(B) 11596 PI Index [A/B] 1.85

3) Required rate as per CAPM = Risk free rate of return + beta ( Market risk premium)

=2.91% + 1.19(7.89%)

=2.91%+9.3891%

=12.30%

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