Could someone tell me the correct answer to this valuation multiple choice?
This was one of the questions for the online stage of an application for an internship with an EB:
*Company A has estimated that a proposed project's 10 year annual net cash benefit will be $2,500 received at the end of each year with an additional terminal benefit of $5,000 at the end of year 10. Assuming these cash flows give a rate of return of 8%, calculate the initial cash outlay
A) 19,990 B) 16,775 C) 25,000 D) 19,090 *
I can't seem to get one of the answers in the list. If anyone has any idea i'd really appreciate some help, i'm sure I have just got the equation incorrect but so far I haven't been able to solve it.
Thanks in advance.
bump
I got D by separating it into two separate cash flow streams. Calculate the present value of the $2,500 cash flows by discounting it back 10 years at 8%. Then discount the terminal cash flow of $5,000 10 years at 8% to present value. Add the present values and it should be about 19,090.
I'm assuming you are referring to the present value of the cash flows. In that case, you can use the following formula:
'Cash flow year x' / 1.08^(x)
In this case, for year 1 it would look like this: 2,500/1.08^1, and for year 10 it would be 7,500/1.08^10. If you add all the numbers starting from year 1 all the way until year 10 you get a PV of 19,091, the closest answer is 19,090 so you can go for that one.
do you mind sharing other questions that were asked
The others were very standard questions like "what is the EBITDA multiple for a purchase price of x if EBITDA is y, I could share them if you really like but I don't think you'd see much that isn't in the guides on WSO"
That's ok I was just wondering if there were any tough ones to practice on but thank you anyway!
Wtf is this for the US? I never had online exams during EB recruiting
It wasn't for the US, it was for an internship in London and was one of the questions in the numerics test. I might have confused people when I said exam - it was one of those multiple choice numerical tests that you complete online before you get to the phone interviews.
yea in the US we dont have those for EBs. Just phone interview and superday
I got D
This looks to be what most people got. I was quite confused when I saw it because I only had a hand calculator and it was timed so I wasn't about to write out a sum series on my casio.
Did you have a financial calculator? I was able to do this on a Ti ba2+.
Are you a finance major? Because this is a pretty straightforward annuity pricing questions that's usually covered in the first year of a finance degree. Equation to solve this is (2500/0.08)(1-1.08^-10)+5000/1.08^10, which gives 19091.171. Do the interview prep guides not cover stuff like this? Honest question, I was thinking about buying one of them myself.
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