Exam 11: Investment Decision Criteria

Fitchminster Armored Car can purchase a new vehicle for $200,000 that will provide annual net cash flow over the next five years of $40,000, $45,000, $50,000, $55,000, $60,000. The salvage value of the vehicle will be $25,000. Assume that the vehicle 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.)

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

Errors in capital budgeting decisions

Discuss the merits and shortcomings of using the payback period for capital budgeting decisions.

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

Mutually exclusive projects may be ranked differently when higher or lower discount rates are used.

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

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.)

Which of the following techniques places the greatest emphasis on cash flows received early in the life of a project?

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.

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

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).

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.

Net present value is suitable for comparing projects with unequal lives.

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.

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 mutually exclusive

Which of the following is a correct EXCEL formula to solve for the net present value of a project? Assume that CF0 is expressed as a negative number.

Although discounted cash flow decision techniques have become widely accepted, their use depends to some degree on the size of the project and where within the firm the decision is being made.

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

Two projects are under consideration by the same company at the same time. Project Alpha has a NPV of $20 million and an estimated useful life of 10 years. Project Beta has a NPV of $12 million and also an estimated useful life of 10 years. What should the company's decision be? a) if the projects involve unrelated expansion decisions or b) if the projects are mutually exclusive because they would have to occupy the same space?