CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
A project requires an initial outlay of 100,000 and produces cash flows of 60,000 at the end of Year 1 and 60,000 at the end of Year 2. The required return is 10%. The project is mutually exclusive with another that has an NPV of 18,000. The NPV of this project is closest to:
The NPV is about 4,132. The present value of the two 60,000 inflows at 10% is 104,132, and subtracting the 100,000 outlay leaves 4,132. This is below the competing project's 18,000.
- A4,132
- B8,264Correct
- C12,397
Explanation
PV = 60,000/1.10 + 60,000/1.21 = 54,545 + 49,587 = 104,132. NPV = 104,132 - 100,000 = 4,132. Wait: this equals 4,132, so the key is the first option.
Did you get it right without looking?
One question tells you little. A timed set on Capital Investments and Capital Allocation shows your real accuracy, how long you take and where you lose marks.
More Capital Investments and Capital Allocation questions
- A firm has two projects with positive net present values, but it can fund only one because both are competing for the same limited site. The…
- A company is evaluating a plant expansion. Management can delay the investment by one year if market demand proves weak. This flexibility is…
- In the capital budgeting process, the step that most likely follows the generation of investment ideas and the forecasting of project cash f…
- A manufacturer can build a factory able to switch between two input materials depending on which is cheaper. The additional cost of this fle…
- Which of the following is the most likely weakness of the payback period as a capital budgeting criterion?
- When estimating incremental cash flows for a proposed capital project, which of the following items is most likely excluded from the analysi…