Exam 11: Investment Decision Criteria

One drawback of the payback method is that it focuses primarily on the length of time in which the cost of the investment is recovered in nominal terms versus measuring total value the project will add to the firm.

The IRR assumes that cash flows are reinvested at the cost of capital.

Which of the following are typical consequences of good capital budgeting decisions?

Which of the following would NOT be considered a capital budgeting decision?

If the project's payback period is greater than or equal to zero,the project should always be accepted.

Errors in capital budgeting decisions:

Central Mass Ambulance Service can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years.The salvage value of the ambulance will be $25,000.Assume the ambulance is sold at the end of year 5.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1. )

Why are capital budgeting decisions among the most important decisions made by any company? Give a few examples from recent business developments.

The profitability index provides the same decision result as the net present value (NPV)method.

Kannan Enterprise has a project with an initial outlay of $40,000,followed by three years of annual incremental cash flows of $35,000.The terminal cash flow of the project is $10,000.Assuming a discount rate of 10%,which of the following is the correct equation to solve for the IRR of the project?

When several sign reversals in the cash flow stream occur,the IRR equation can have more than one positive IRR.

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years,$10,000 for the next two years,and $8,000 for the fifth year? Use a discount rate of 8%.Would you accept or reject the investment?

Use the following to answer the following question(s). The information below describes a project with an initial cash outlay of $10,000 and a required return of 12%. -Which of the following statements is correct?

Two projects are under consideration by the same company at the same time.Project Alpha has a NPV of $20 million and an estimated useful life of 10 years.Project Beta has a NPV of $12 million and also an estimated useful life of 10 years.What should the company's decision be a)if the project's involve unrelated expansion decisions or b)if the project's are mutually exclusive because they would have to occupy the same space?

Which of the following best explains the continuing popularity of the payback method?

Use the following to answer the following question(s). The information below describes a project with an initial cash outlay of $10,000 and a required return of 12%. -You have been asked to analyze a capital investment proposal.The project's cost is $2,775,000.Cash inflows are projected to be $925,000 in Year 1;$1,000,000 in Year 2;$1,000,000 in Year 3;$1,000,000 in Year 4;and $1,225,000 in Year 5.Assume that your firm discounts capital projects at 15.5%.What is the project's NPV?

Manheim Candles is considering a project with the following incremental cash flows.Assume a discount rate of 10%. Calculate the project's MIRR.(Round to the nearest whole percentage. )

Although discounted cash flow decision techniques have become widely accepted,their use depends to some degree on the size of the project and where within the firm the decision is being made.

Project Full Moon has an initial outlay of $30,000,followed by positive cash flows of $10,000 in year 1,$15,000 in year 2,and $15,000 in year 3.The project should be accepted if the required rate of return is:

We-Know-Widgets,Inc.is analyzing a project that requires an initial investment of $10,000,followed by cash inflows of $1,000 in Year 1,$4,000 in Year 2,and $15,000 in Year 3.The cost of capital is 10%.What is the profitability index of the project?