Exam 11: Investment Decision Criteria

Use the following information to answer the following question(s). Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%. -Discounted payback for Project Y is:

Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs,cash flow for the third and final year of the project is $(170,000).If the company 's required rate of return is 12%,the project should be:

Tinker Tools,Inc.is considering a project with the following cash flows.Calculate the MIRR of the project assuming a reinvestment rate of 8%.

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 MIRR?

The equivalent annual cost method is most appropriate in which of the following situations? In each case,assume that several mutually exclusive options are available.

Which of the following series of cash flows could have more than one IRR? (Negative cash flows are in parentheses. )

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1,$40,000 in year 2,and $70,000 in year 3.If the discount rate increases from 10% to 16%:

The higher the discount rate,the greater the importance of the early cash flows.

Use the following information to answer the following question(s). Below are the expected after-tax cash flows for Projects Y and Z.Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%. -What is payback for Project Z?

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 10% discount rate.Would you accept the project?

Discuss the merits and shortcomings of using the payback period for capital budgeting decisions.

Most firms use the payback period as a secondary capital-budgeting technique,which in a sense allows them to control for risk.

A project has an initial outlay of $4,000.It has a single payoff at the end of Year 4 of $6,996.46.What is the IRR for the project (round to the nearest percent)?

According to the modified internal rate of return (MIRR)technique,when a project's MIRR is greater than its cost of capital,the project should be accepted.

Which of the following is a typical capital budgeting decision?

If a project has a profitability index greater than 1,

ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years.Calculate the NPV of the assembler if the required rate of return is 12%.(Round your answer to the nearest $1. )

MacHinery Manufacturing Company is considering a three-year project that has a cost of $75,000.The project will generate after-tax cash flows of $33,100 in Year 1,$31,500 in Year 2,and $31,200 in Year 3.Assume that the appropriate discount rate is 10% and that the firm's tax rate is 40%.What is the project's discounted payback period?

Project Black Swan requires an initial investment of $115,000.It has positive cash flows of $140,000 for each of the next two years.Because of major demolition and environmental clean-up costs,cash flow for the third and final year of the project is $(170,000).

The director of capital budgeting of South Park Development Corporation is evaluating a project that will cost $200,000;it is expected to last for 10 years and produce after-tax cash flows,including depreciation,of $44,503 per year.If the firm's cost of capital is 14% and its tax rate is 40%,what is the project's IRR?