Exam 11: Investment Decision Criteria

Project Eh! requires an initial investment of $50,000,and has a net present value of $12,000.Project B requires an initial investment of $100,000,and has a net present value of $13,000.The projects are proposals for increasing revenue and are not mutually exclusive.The firm should accept:

Dudster Manufacturing has 2 options for installing legally required safety equipment.Option Ex has an initial cost of $25,000 and annual operating costs over 3 years of $5,000,$5,250,$5,600.Option WYE has an initial cost of $40,000 and annual operating costs of $4,000,$4,200,$4,450,$4,750,$5,100.Whether Dudster chooses Ex or Wye,the equipment is always needed and must be replaced at the end of its useful life.Which choice is least expensive over the long run? Use a discount rate of 9%.

Suppose you determine that the NPV of a project is $1,525,855.What does that mean?

Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk.

Competitive market forces make it imperative for a firm to have a systematic strategy for generating capital-budgeting projects.

Which of the following is the correct equation to solve for the net present value of a project.

Warchester Inc.is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4,000 per year in annual operating costs over the equipment's estimated useful life of 5 years.The company will use a discount rate of 8.5%.What is the equivalent annual cost?

Artie's Soccer Ball Company is considering a project with the following cash flows: Initial outlay = $750,000 Incremental after-tax cash flows from operations Years 1-4 = $250,000 per year Compute the NPV of this project if the company's discount rate is 12%.

Your company is considering a project with the following cash flows: Initial outlay = $1,748.80 Cash flows Years 1-6 = $500 Compute the IRR on the project.

The size of capital investments and the difficulty in reversing them once they are made make capital-budgeting decisions very important to the firm.

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.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1. )

The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4,$35,000 per year in Years 5 through 9,and $40,000 in Year 10.This investment will cost the firm $150,000 today,and the firm's cost of capital is 10%.Assume cash flows occur evenly during the year,1/365th each day.What is the discounted payback period for this investment?

Briefly describe the actual capital budgeting methods of large U.S.corporations.

Project Ell requires an initial investment of $50,000 and the produces annual cash flows of $30,000,$25,000,and $15,000.Project Ess requires an initial investment of $60,000 and then produces annual cash flows of $25,000 per year for the next ten years.The company ranks projects by their payback periods.

Distinguish between revenue enhancement investments,cost-reduction investments,and mandated investments.

The IRR (to the nearest whole percent)is:

Whenever the IRR on a project equals that project's required rate of return,

Project EH! requires an initial investment of $50,000,and has a net present value of $12,000.Project BE requires an initial investment of $100,000,and has a net present value of $13,000.The projects are mutually exclusive.The firm should accept:

Which of the following is considered to be a deficiency of the IRR?

The IRR is the discount rate that equates the present value of the project's future net cash flows with the project's initial outlay.