Exam 11: Investment Decision Criteria

The owner of a small construction business has asked you to evaluate the purchase of a new front end loader.You have determined that this investment has a large,positive,NPV,but are afraid that your client will not understand the method.A good alternative method in this circumstance might be

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%.

One advantage of the payback method is that it can be readily understood by people with no special training in finance.

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 company accepts all projects with a payback period of 2 years or less.

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

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. )

The profitability index provides the same accept/reject decision result as the net present value (NPV)method but would not necessarily rank mutually exclusive projects the same way.

Compute the payback period for a project with the following cash flows,if the company's discount rate is 12%. Initial outlay = $450 Cash flows: Year 1 = $325 Year 2 = $65 Year 3 = $100

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?

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

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%.

Webley Corp.is considering two expansion options,but does not have enough capital to undertake both,Project W requires an investment of $100,000 and has an NPV of $10,000.Project D requires an investment of $80,000 and has an NPV of $8,200.If Webley uses the profitability index to decide,it would

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. )

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.

Dieyard Battery Recyclers is considering a project with the following cash flows: Initial outlay = $13,000 Cash flows: Year 1 = $5,000 Year 2 = $3,000 Year 3 = $9,000 If the appropriate discount rate is 15%,compute the NPV of this project.

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.

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

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?

Which of the following statements is correct?

Recent surveys of the CFOs of large U.S.companies rank the popularity of major capital budgeting methods in which order?