Exam 10: Capital Budgeting Techniques

The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 for the next three years is 3.33 years.

Research and development is considered to be a motive for making capital expenditures.

Unlike the net present value criteria, the internal rate of return approach assumes a reinvestment rate equal to ________.

Which of the following capital budgeting techniques ignores the time value of money?

A capital expenditure is an outlay of funds invested only in fixed assets that is expected to produce benefits over a period of time less than one year.

Payback is considered an unsophisticated capital budgeting because it ________.

Mutually exclusive projects are those whose cash flows are constant over a specified period of time and more than one project needs to be accepted in order to implement capital budgeting decisions.

The discount rate is the minimum return that must be earned on a project to leave a firm's market value unchanged.

The major weakness of payback period in evaluating projects is that it cannot specify the appropriate payback period in light of the wealth maximization goal.

Which of the following is a strength of payback period?

A conventional cash flow pattern associated with capital investment projects consists of an initial ________.

Which of the following is a disadvantage of payback period approach?

Which of the following is a reason for firms not using the payback method as a guideline in capital investment decisions?

The minimum return that must be earned on a project in order to leave the firm's value unchanged is ________.

A firm with limited dollars available for capital expenditures is subject to ________.

If a firm is subject to capital rationing, it is able to accept all independent projects that provide an acceptable return.

Table 10.1 -Given the information in Table 10.1 and 15 percent cost of capital, (a) compute the net present value. (b) should the project be accepted?

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a project's inflows to the present value of its outflows is called net present value.

Tangshan Mining Company is considering investing in a new mining project. The firm's cost of capital is 12 percent and the project is expected to have an initial after-tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3, and ($1,300,000) in year 4? (a) Calculate the project's NPV. (b) Calculate the project's IRR. (c) Should the firm make the investment?

A nonconventional cash flow pattern is one in which an initial inflow is followed by a series of inflows and outflows.