Presentation Questions

Question 1. Outline the four steps in the capital-expenditure process

Question 2. The payback period method of project evaluation is biased against projects with longer developmental lives, even when they ultimately generate greater value for the firm. Discuss

Question 3. Discount rates, IRR and NPV analaysis

Assume you are asked to analyse the following projects:

Cash Flow

Construct a spreadsheet, and associated graphs that will enable you to analyse the impact of different discount rates on the NPV of a project as well as calculate the IRR for a project (an example is provided in figure 5.2 of the main recommended textbook).

a) Rank the three projects assuming the appropriate discount rate is:

i) 6% per annum
ii) 10% per annum
iii) 15% per annum

b) Calculate the IRR for each of the projects, then rank them.

Question 4. Application of NPV Method.

The furniture division of the Playfun Ltd, a profitable, diversified company, purchased a machine 5 years ago for $75,000. When it was purchased the machine had an expected useful life of 15 years and an estimated value of zero at the end of its life. The machine currently has a market value of $10,000. The division manager reports that he can buy a new machine for $160,000 (including installation) which, over its 10-year life, will result in an expansion of sales from $100,000 to $110,000 per annum. In addition, it is estimated that the new machine will reduce annual operating costs from $70,000 to $50,000. If the required rate of return is 10% per annum, should Playfun buy the new machine? Explain and show your calculations.

Question 5. A property Development company plans to demolish the building on a site that it already owns, and then build a convenience store. Which of the following items should be included as incremental cash flows when the project is evaluated.

a) The market value of the property
b) The cost of demolishing the old building
c) The cost of new water and electric power connections installed 3 months ago
d) A portion of the cost of leasing cars used by the company's executive
e) Money that has already been spent on architectural concept plans for the new building
Explain your decision

Question 6. What are the benefits of diversification to an investor? What is the key factor determining the extent of these benefits? Explain

Question 7. Expected return, risk and diversification.
Harry Jones has invested one-third of his funds in Share 1 and two-third of his funds in Share
2. His assessment of each investment is as follows:

a) What are the expected return and the standard deviation of return on Harry's portfolio?
b) Recalculate the expected return and the standard deviation where the correlation between the returns is 0 and 1.0, respectively
c) Is Harry better or worse off as a result of investing in two securities rather than in one security?

Question 8. Total risk can be decomposed into systematic and unsystematic risk. Explain each component of risk and how each is affected by increasing the number of securities in a portfolio.