Exam 11: Investment Decision Criteria

Some capital budgeting decisions may be mandated by government regulations.

Why is it so difficult for firms to find good investment ideas?

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

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. )

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

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 firm's proper rate of discount is 10% and that the firm's tax rate is 40%.What is the project's payback?

When several sign reversals in the cash flow stream occur,the IRR equation can have more than one positive IRR.

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

The present value of the total costs over a five year period for Project April is $50,000.The net present value of total costs over a 4 year period for Project October is $40,000.The company uses a discount rate of 9%.Which project should it choose and why?

The internal rate of return (IRR)will increase as the required rate of return of a project is increased.

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

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

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. Year Cash Flows 0 ($120,000) 1 $30,000 2 $70,000 3 $90,000

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 is 10% and the projects are not mutually exclusive

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

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