(Answered) I sample problem 1 a mom and pop store is going to make a

Finance

I. SAMPLE PROBLEM # 1

A "mom and pop store" is going to make a $15,000 investment that will produce the following cash inflows:

Year 1.....$11,000
Year 2.....$ 9,000
Year 3.....$ 5,800

a). What is the payback period for this investment?

b). Assuming a discount rate/cost of capital of 10%, what is the NPV of this investment and should it be accepted?

II. SAMPLE PROBLEM # 2

Consider the following project:

Year 0 Investment..... -$145,000
Year 1 Cash Flow....... 71,000
Year 2 Cash Flow....... 68,000
Year 3 Cash Flow....... 52,000

What is the IRR and if the required rate of return is 14%, should the project be accepted?

2. In the overall process of assessing project risk, what is the difference between sensitivity and scenario analysis. How can each be used to measure and prepare for risks associated with capital budgeting efforts? Is one approach better than the other?

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