Please breifly show working! The net present calue method of project evaluatio i
ID: 2624950 • Letter: P
Question
Please breifly show working!
The net present calue method of project evaluatio is preferred to the internal rate of return because:
a) The IRR method may give multiple rates of return or zero rates of return in some cases, but not for mutually exclusive projects.
b) The IRR method may give an inconsistent rank due to the magnitude or timing of cash
flow.
c) Most projects are independent rather than mutually exclusive.
d) The IRR method yields net present value profiles that do not intersect for mutually exclusive projects.
Bulwark Musical Instrument several products, one of which is facing increasing competition from cheaper, plastic alternatives. It expects that in coming years the number of units sold will fall by 10% pa. In the year just completed, the fixed costs attributable to this product amounted to $35,000, while variable costs attributable to the product were $28 per unit produced. Sales this year were 28,000 units. Bulwark expects that in the coming years, fixed costs of thisproductm and variable costs per unit, will increase in line with inflation, which is forecast to be 4% pa. However, because of the competition from the plastic alternatives, it sees no scope for increasing the price per unit from its current level of $42. Based on these forecasts, the nominal net cash flow, four years from nowm is forecast to be closest to:
a) $119,396
b) $128,877
c) $134,819
d) $217,886
Acuity Education Ltd (ACE) wishes to estimate its weighted average cost of capital. It has two sources of capital: ordinary shares and debentures maturing in 5 years. Currently, the market value of the shares is $18.45 per share and the market value of the debentures is $115.080 per $100 par value. The shares have recently paid an annual dividend of $2.52 per share and the debentures pay an annual coupon interest of $12.80 per $100 par value. The face value of the debentures on issue is $115 million. There are 13,500,000 ordinary shares on issue, The expected growth rate of dividens per share is 2.3% pa. Ignore taxes. ACE's weighted average cost of capital is closest to:
a) 13.52% pa
b) 13.73% pa
c) 13.95% pa
d) 15.07% pa
Thank you
Explanation / Answer
1.a) The IRR method may give multiple rates of return or zero rates of return in some cases, but not for mutually exclusive projects
2.C
3.D.