A project is expected to generate a cash flow of £250 at the end of each of three consecutive years, as illustrated below: End of year 1 2 3 Cash flow £250 £250 £250 The project manager uses a discount rate of 10% to evaluate the project. Which of the following statements is/are incorrect? a. Economic capital at the start of year 1 (K0) equals £621.7 (rounded to one decimal). b. If all cash flows were distributed when received (i.e. if payout was 100%), economic income in year 2 (Y2) would equal £62.2 (rounded to one decimal). c. If the project manager did not distribute any of the project cash flows (i.e. if payout was 0%), the project’s economic capital would not depreciate during year 1. d. If the project manager distributed all of the project cash flows (i.e. if payout was 100%), the project’s economic capital would depreciate over time.
A project is expected to generate a cash flow of £250 at the end of each of three consecutive years, as illustrated below: End of year 1 2 3 Cash flow £250 £250 £250 The project manager uses a discount rate of 10% to evaluate the project. Which of the following statements is/are incorrect? a. Economic capital at the start of year 1 (K0) equals £621.7 (rounded to one decimal). b. If all cash flows were distributed when received (i.e. if payout was 100%), economic income in year 2 (Y2) would equal £62.2 (rounded to one decimal). c. If the project manager did not distribute any of the project cash flows (i.e. if payout was 0%), the project’s economic capital would not depreciate during year 1. d. If the project manager distributed all of the project cash flows (i.e. if payout was 100%), the project’s economic capital would depreciate over time.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 21P
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Question
A project is expected to generate a cash flow of £250 at the end of each of three consecutive years, as illustrated below:
|
End of year |
1 |
2 |
3 |
|
Cash flow |
£250 |
£250 |
£250 |
The project manager uses a discount rate of 10% to evaluate the project.
Which of the following statements is/are incorrect?
a. Economic capital at the start of year 1 (K0) equals £621.7 (rounded to one decimal).
b. If all cash flows were distributed when received (i.e. if payout was 100%), economic income in year 2 (Y2) would equal £62.2 (rounded to one decimal).
c. If the project manager did not distribute any of the project cash flows (i.e. if payout was 0%), the project’s economic capital would not depreciate during year 1.
d. If the project manager distributed all of the project cash flows (i.e. if payout was 100%), the project’s economic capital would depreciate over time.
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