Exam 11: Investment Decision Criteria

A new forklift under consideration by Home Warehouse requires an initial investment of $100,000 and produces annual cash flows of $50,000, $40,000, and $30,000. Which of the following will not change if the required rate of return is increased from 10% to 12%.

Warchester Inc. is considering the purchase of a 3-D printer that will require an initial investment of $15,000. The printer will produce parts at a net savings of $4,000 per year in operating costs. The company will use a discount rate of 8.5%. What is the NPV of this equipment to the nearest dollar?

The size of capital investments and the difficulty in reversing them once they are made make capital-budgeting decisions very important to the firm.

Briefly describe the actual capital budgeting methods of large U.S. corporations.

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%.

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

Worcester Corp is considering two mandated projects. They would serve the same purpose and be mutually exclusive. The present value of total costs over a five year period for Project November is $50,000. The present value of total costs over a 4 year period for project December is $40,000. The company uses a discount rate of 9%. Which project should it choose and why?

Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk.

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

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

Discounted payback periods for projects Y and Z are

WKW, Inc. is analyzing a project that requires an initial investment of $10,000, followed by cash inflows of $1,000 in Year 1, $4,000 in Year 2, and $15,000 in Year 3. The cost of capital is 10%. What is the profitability index of the project?

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?

Good capital investment opportunities are most likely to exist when

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

Project Sigma requires an investment of $1 million and has a NPV of $10. Project Delta requires an investment of $500,000 and has a NPV of $150,000. The projects involve unrelated new product lines. The firm can raise unlimited amounts of capital.

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

Manheim Candles is considering a project with the following incremental cash flows. Assume a discount rate of 10%. Year Cash Flow 0 ($20,000) 1 0 2 $30,000 3 $30,000 Calculate the project's MIRR. (Round to the nearest whole percentage.)

Which of the following is considered to be a deficiency of the IRR?

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