Value

1. Investment criteria. Calculate the payback, the discounted payback, and the NPV at a required return of 15 percent.

Year Cash Flow

0 - 100 T.Lt. 1 50 2 40 3 40 4 15

2. Discounted payback. An investment project has annual cash inflows of 500 Lt., 600 Lt., 700 Lt. and 800 Lt., and a discount rate of 10 %. What is the discounted payback period for these cash flows if the initial cost is 1800 Lt.?

3. An investment project costs 3000 Lt. with annual cash flows of 750 Lt. for five years. What is the discounted payback period if the discount rate is 5 percent? 10 percent?

4. What is the profitability index for the following set of cash flows if the relevant discount rate is 8 percent? 12 percent? 18 percent? Please, explain it.

Year Cash Flow

0 - 1400 Lt. 1 800 2 500 3 500

5. Comparing Investment Criteria.

Consider the following two mutually exclusive projects:

Year Investment A Investment B

0 - 260 000 T.Lt. - 40 000 T.Lt. 1 5 000 45 000 2 15 000 5 000 3 15 000 500 4 425 000 500

a) If you apply the payback criterion, which investment will you choose? Why? b) If you apply the discounted payback criterion, which investment will you choose? Why? c) If you apply the NPV criterion, which investment will you choose? Why? d) If you apply the IRR criterion, which investment will you choose? Why? e) If you apply the profitability index criterion, which investment will you choose? Why? f) Based on your answers in (a) through (e), which project will you finally choose?