Exam 11: Investment Decision Criteria

We compute the profitability index of a capital-budgeting proposal by:

Good capital investment opportunities are most likely to exist when:

Project January has a NPV of $50,000,project December has a NPV of $40,000.Which of the following circumstances could make it possible to choose December over January?

A machine has a cost of $5,575,000.It will produce cash inflows of $1,825,000 (Year 1);$1,775,000 (Year 2);$1,630,000 (Year 3);$1,585,000 (Year 4);and $1,650,000 (Year 5).At a discount rate of 16.25%,the project should be:

Determine the IRR on the following projects: a.Initial outlay of $35,000 with an after-tax cash flow at the end of the year of $5,836 for seven years b.Initial outlay of $350,000 with an after-tax cash flow at the end of the year of $70,000 for seven years c.Initial outlay of $3,500 with an after-tax cash flow at the end of the year of $1,500 for three years

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%. -Payback for Project Y is:

You are considering investing in a project with the following year-end after-tax cash flows: Year 1: $5,000 Year 2: $3,200 Year 3: $7,800 If the initial outlay for the project is $12,113,compute the project's IRR.

Aroma Candles,Inc.is evaluating a project with the following cash flows.The project involves a new product that will not affect the sales of any other project.Which two methods would always lead to the same accept/reject decision for this project,regardless of the discount rate.

Analysis of a machine indicates that it has a cost of $5,375,000.The machine is expected to produce cash inflows of $1,825,000 in Year 1;$1,775,000 in Year 2;$1,630,000 in Year 3;$1,585,000 in Year 4;and $1,650,000 in Year 5.What is the machine's IRR?

If the NPV of a project is zero,then the profitability index should equal one.

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 is a correct equation to solve for the NPV of the project that has an initial outlay of $30,000,followed by incremental cash inflows in the next 3 years of $15,000,$20,000,and $30,000? Assume a discount rate of 10%.

Consider a project with the following cash flows: Compute the profitability index if the company's discount rate is 10%.

Which of the following factors is least important to capital budgeting decisions.?

Project H requires an initial investment of $100,000 and the produces annual cash flows of $50,000,$40,000,and $30,000.Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000,$40,000,and $50,000.If the required rate of return is greater than 0% and the projects are mutually exclusive:

Project November requires an initial investment of $500,000.The present value of operating cash flows is $550,000.Project December requires an initial investment of $750,000.The present value of operating cash flows is $810,000. a.Compute the profitability index for each project. b.If the the projects are mutually exclusive,does the profitability index rank them correctly?

The required rate of return represents the cost of capital for a project.

Capital budgeting is the decision-making process with respect to investment in working capital.

A machine costs $1,000,has a three-year life,and has an estimated salvage value of $100.It will generate after-tax annual cash flows (ACF)of $600 a year,starting next year.If your required rate of return for the project is 10%,what is the NPV of this investment? (Round your answer to the nearest $10. )

A machine has a cost of $5,375,000.It will produce cash inflows of $1,825,000 (Year 1);$1,775,000 (Year 2);$1,630,000 (Year 3);$1,585,000 (Year 4);and $1,650,000 (Year 5).At a discount rate of 16.25%,what is the NPV?

WSU Inc.has various options for replacing a piece of manufacturing equipment.The present value of costs for option Ell is $84,000.Option Ell has a useful life of 5 years;annual operating costs were discounted at 9%.What is the equivalent annual cost?