Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively. Time: 0 1 2 3 Project A Cash flow: -1,000 300 400 700 Project b Cash flow: -500 200 400 300 Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. Time: 0 1 2 3 Project A Cash flow: -20,000 10,000 30,000 1,000 Project b Cash flow: -30,000 10,000 20,000 50,000 Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected? Time 0 1 2 3 4 5 6 Cash Flow -\ 85,000 \ 12,000 \ 11,000 \ 13,000 \ 21,000 \ 31,000 \ 32,000

Of the capital budgeting techniques discussed, which works equally well with normal and non-normal cash flows and with independent and mutually exclusive projects?

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively. Time: 0 1 2 3 Project A Cash flow: -1,000 300 400 700 Project b Cash flow: -500 200 400 300 Use the NPV decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. Time 0 1 2 3 4 5 Cash Flow -125,000 65,000 78,000 105,000 105,000 25,000 Use the MIRR decision rule to evaluate this project; should it be accepted or rejected?

Compute the payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable payback is five years. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent. Project Y Time 0 1 2 3 4 Cash Flow -\ 8,000 \ 3,350 \ 4,180 \ 1,520 \ 2,000

The net present value decision technique may not be the only pertinent unit of measure if the firm is facing

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. Time 0 1 2 3 4 5 Cash Flow -125,000 65,000 78,000 105,000 105,000 25,000 Use the discounted payback decision rule to evaluate this project; should it be accepted or rejected?

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected? Time 0 1 2 3 4 5 6 Cash Flow -\ 5,000 \ 1,300 \ 1,400 \ 1,600 \ 1,600 \ 1,100 \ 2,000

Which of the following statements regarding discounted payback (DPB) is/are not true?

Suppose you have a project whose discounted payback is equal to its termination date. What can you say for sure about its PI?

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose

We accept projects with a positive NPV because it means that

Which of the following statements is correct?

All of the following capital budgeting tools are suitable for non-normal cash flows EXCEPT

Which of the following statements is correct?

All of the following are strengths of NPV EXCEPT

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year. Time: 0 1 2 3 4 5 Cash flow: -100 75 100 300 75 200