Exam 11: Investment Decision Criteria

Which of the following techniques will always produce a single rate of return estimate?

Which of the following factors is least important to capital budgeting decisions?

The internal rate of return method results in the same accept/reject decision as the net present value (NPV) method but would not necessarily rank mutually exclusive projects the same way.

Nouvel An S.A. is considering a project that requires an initial investment of $51,000. It is expected to produce annual cash flows of $35,000, $25,000 and $15,000. What is the discounted payback period for this project if the discount rate is 12%?

Adam and Eve are thinking of leaving their high pressure jobs in finance and buying a frozen yogurt franchise. The franchise will generate strong positive cash flow initially, but the potential owners are not sure how long demand for this product will continue into the future. A useful technique for making this decision would be

The payback method focuses primarily on the length of time required to recover the cost of the investment rather than estimating the total value the project will add to the firm.

Which of the following circumstances might contribute to the usefulness of the discounted payback method?

Equipment should be replaced whenever replacement results in a positive NPV.

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

Some capital budgeting decisions may be mandated by government regulations.

The internal rate of return for capital projects is mathematically the same concept as the yield to maturity for bonds.

When various capital budgeting techniques rank mutually exclusive projects differently, which of the following is theoretically most reliable?

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.

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%.

The present value of the total costs over a five year period for Project April is $50,000. The present value of total costs over the same 5 year period for Project October is $40,000. The company uses a discount rate of 9%. There are no positive cash flows for these projects, but one or the other is required to comply with government regulations. Which project should be chosen and why?

Which of the following is a correct equation to solve for the NPV of the project that has an initial outlay of $30,000, followed by incremental cash inflows in the next 3 years of $15,000, $20,000, and $30,000? Assume a discount rate of 10%.

Consider a project with the following cash flows: After-Tax After-Tax Accounting Cash Flow Year Profits from Operations 1 $799 $750 2 $150 $1,000 3 $200 $1,200 Initial outlay = $1,500 Terminal cash flow = 0 Compute the profitability index if the company's discount rate is 10%.

A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of $6,996.46. What is the IRR for the project (round to the nearest percent)?

When charting a project's NPV profile, the curve will cross the horizontal axis at

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