Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the PI decision to evaluate this project; should it be accepted or rejected?

Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?

This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project plus interest at market rates.

Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return.

Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Compute the NPV statistic for Project U given the following cash flows and if the appropriate cost of capital is 9 percent. Project U

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose

Compute the PI statistic for Project Q and advise the firm whether to accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent. Project Q

A disadvantage of the payback statistic is that ___________.

All of the following are strengths of payback except ____________________.

The MIRR statistic is different from the IRR statistic in that _____________.

Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Compute the Payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 11 percent and the maximum allowable payback is 1 years.

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.

This technique for evaluating capital projects is particularly useful when firms face time constraints in repaying investors.

Compute the MIRR for Project Y and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent.

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8%. Should this project be accepted, and why?

Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?