Exam 11: Investment Decision Criteria

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

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

Tinker Tools,Inc.is considering a project with the following cash flows.Calculate the MIRR of the project assuming a reinvestment rate of 8%. Year Cash Flows 0 ($70,000) 1 ($55,000) 2 $40,000 3 $60,000 4 $100,000

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

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.

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?

The equivalent annual cost (EAC)method is helpful for mutually exclusive projects with unequal economic lives.

Project H requires an initial investment of $100,000 and 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.The projects are mutually exclusive.The company accepts projects with payback periods of 3 years or less.

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. )

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.

Which of the following techniques might be useful in situations where the economic life of a project is highly uncertain?

Errors resulting from a capital budgeting decision are not considered major since the consequences of such errors average out over the life of the investment.

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?

Dizzyland Enterprises has been presented with an investment opportunity which will yield end-of-year 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%.What is the profitability index for this investment?

Frazier Fudge has a project with an initial outlay of $40,000,followed by three years of annual incremental cash flows of $35,000.At the end of the third year,equipment will be sold producing additional cash flow of $10,000.Assuming a discount rate of 10%,which of the following is the correct equation to solve for the IRR of the project?

Good capital investment opportunities are most likely to exist when

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?

Black Friday Inc.has estimated the following cash flows for a project it is considering: a.What is the payback period for this project? b.What is the obvious problem with using the payback method in this case?

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?

Initial Outlay Cash Flow in Period 1 2 3 4 -$4,000 $1,546.17 $1,546.17 $1,546.17 $1,546.17 The IRR (to the nearest whole percent)is