Exam 10: Capital-Budgeting Techniques and Practice

Interstate Appliance Inc.is considering the following 3 mutually exclusive projects.Projected cash flows for these ventures are as follows: If Interstate Appliance has a 12% cost of capital,what decision should be made regarding the projects above?

An independent project should be accepted if it

A project would be acceptable if

Consider a project with the following information: Initial outlay = $1,500 Compute the profitability index if the company's discount rate is 10%.

If the NPV (Net Present Value)of a project with one sign reversal is positive,then the project's IRR (Internal Rate of Return)________ the required rate of return.

NPV is the most theoretically correct capital budgeting decision tool examined in the text.

If project A generates $10 million of free cash flow over its five year useful life and project B generates $8 million of free cash flow over its useful life,then Project A will have a shorter payback period than Project B,assuming both projects require the same initial investment.

Compute the discounted payback period for a project with the following cash flows received uniformly within each year and with a required return of 8%:

Project Alpha has an internal rate of return (IRR)of 15 percent.Project Beta has an IRR of 14 percent.Both projects have a required return of 12 percent.Which of the following statements is MOST correct?

Marketing is crucial to capital budgeting success because the goal of a good capital budgeting project is to maximize the company's sales.

Many financial managers believe the payback period is of limited usefulness because it ignores the time value of money; hence,it is referred to as the discounted payback period.

If the net present value of a project is zero,then the profitability index will equal one.

I301 Motors has several investment projects under consideration,all with positive net present values.However,due to a shortage of trained personnel,a limit of $1,250,000 has been placed on the capital budget for this year.Which of the projects listed below should be included in this year's capital budget? Explain your answer.

What is the internal rate of return's assumption about how cash flows are reinvested?

Mutually exclusive projects occur when

The main disadvantage of the NPV method is the need for detailed,long-term forecasts of free cash flows generated by prospective projects.

If two projects are mutually exclusive then the IRR is more important than the NPV in deciding the project that should be chosen.

DYI Construction Co.is considering a new inventory system that will cost $750,000.The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one,$325,000 in year two,$150,000 in year three,and $180,000 in year four.DYI's required rate of return is 8%.What is the net present value of this project?

Mutually exclusive projects have more than one IRR.

Determine the five-year equivalent annual annuity of the following project if the appropriate discount rate is 16%: Initial Outflow = $150,000 Cash Flow Year 1 = $40,000 Cash Flow Year 2 = $90,000 Cash Flow Year 3 = $60,000 Cash Flow Year 4 = $0 Cash Flow Year 5 = $80,000