Exam 10: Capital-Budgeting Techniques and Practice

Different discounted cash flow evaluation methods may provide conflicting rankings of investment projects when

If a project is acceptable using the IRR criterion,it will also be acceptable using the MIRR criterion.

A project that requires an initial investment of $340,000 is expected to have an after-tax cash flow of $70,000 per year for the first two years,$90,000 per year for the next two years,and $150,000 for the fifth year? Assume the required return for this project is 10%. a.What is the NPV of the project%? b.What is the IRR of the project? c.What is the MIRR of the project? d.What is the PI of the project? e.What decision would you make regarding this project if the required rate of return is 10%? f.What is the equivalent annual annuity using a 10% required rate of return?

A project requires an initial investment of $389,600.The project generates free cash flow of $540,000 at the end of year 4.What is the internal rate of return for the project?

The net present value profile clearly demonstrates that the NPV of a project increases as the discount rate increases.

A machine that costs $1,500,000 has a 3-year life.It will generate after tax annual cash flows of $700,000 at the end of each year.It will be salvaged for $200,000 at the end of year 3.If your required rate of return for the project is 13%,what is the NPV of this investment?

Your company is considering an investment in one of two mutually exclusive projects.Project one involves a labor intensive production process.Initial outlay for Project 1 is $1,495 with expected after tax cash flows of $500 per year in years 1-5.Project two involves a capital intensive process,requiring an initial outlay of $6,704.After tax cash flows for Project 2 are expected to be $2,000 per year for years 1-5.Your firm's discount rate is 10%.If your company is not subject to capital rationing,which project(s)should you take on?

If a project's IRR is equal to its required return,then the project's NPV is equal to zero and its PI is equal to one.

The internal rate of return is

The internal rate of return is the discount rate that equates the present value of the project's free cash flows with the project's initial cash outlay.

If a project's internal rate of return is greater than the project's required return,then the project's profitability index will be greater than one.

Project LMK requires an initial outlay of $500,000 and has a profitability index of 1.4.The project is expected to generate equal annual cash flows over the next ten years.The required return for this project is 16%.What is project LMK's internal rate of return?

We compute the profitability index of a capital budgeting proposal by

If a project is acceptable using the net present value criteria,then it will also be acceptable under the less stringent criteria of the payback period.

Consider the following two projects: a.Calculate the net present value of each of the above projects,assuming a 14 percent discount rate. b.What is the internal rate of return for each of the above projects? c.Compare and explain the conflicting rankings of the NPVs and IRRs obtained in parts a and b above. d.If 14 percent is the required rate of return,and these projects are independent,what decision should be made? e.If 14 percent is the required rate of return,and the projects are mutually exclusive,what decision should be made?

You are in charge of one division of Yeti Surplus Inc.Your division is subject to capital rationing.Your division has 4 indivisible projects available,detailed as follows: If you must select projects subject to a budget constraint of 5 million dollars,which set of projects should be accepted so as to maximize firm value?

Given the following annual net cash flows,determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $750,000.

For the net present value (NPV)criteria,a project is acceptable if NPV is ________,while for the profitability index a project is acceptable if PI is ________.

A significant advantage of the internal rate of return is that it

The profitability index is the ratio of the present value of the future free cash flows to the initial investment.