QUESTIONS 399
Questions for Chapter 12
12.1 The Whitton Co. has an opportunity to buy a computer now for £18,000
that will yield annual net cash inflows of £10,000 for the next three years, after
which its resale value would be zero. Whitton’s cost of capital is 16%.
žCalculate the net present value of the cash flows for the computer using
spreadsheet formula.
žWhat is the IRR?
12.2 SmallCo is considering the following project, whose cost of capital is 12%
per annum:
Year 0 1 2 3
££££
Cash flows of project (2,000) 1,000 800 700Calculate the NPV of the project.
12.3 Goliath Hotel projects the cash flows for three alternative investment
projects (in £’000) as:
ProjectYear012345
A − 350 100 200 100 100 140
B − 350 40 100 210 260 160
C − 350 200 150 240 40 0Depreciation is £70,000 per annum. For each project, calculate the:
žpayback period;
žaccounting rate of return (average);
žnet present value (assuming a cost of capital of 9%); and
žcomment on which (if any) project should be accepted.
12.4 Freddie PLC has £5 million to invest this year. Three projects are available,
and all are divisible, i.e. part of a project may be accepted and the cash flow returns
will be pro-rata. Details of the projects are:
Project 123
Cash outlay (£M) 3.0 2.0 1.5
NPV (£M) 1.7 1.1 1.0What is the ranking of the projects that should be accepted?
12.5 Tropic Investments is considering a project involving an initial cash outlay
for an asset of £200,000. The asset is depreciated over five years at 20% p.a. (based