Question

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.

Answer 1

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%