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

Compute the IRR statistic for Project X and note 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. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project?

Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively. Time: 0 1 2 3 Project A Cash flow: -5,000 1,000 3,000 5,000 Project b Cash flow: -10,000 5,000 5,000 5,000 Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Compute the PI statistic for Project X and note 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. Time: 0 1 2 3 4 5 Cash flow: -250 75 0 100 75 50

Compute the discounted 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 12 percent and the maximum allowable discounted payback is three years. Time: 0 1 2 3 4 5 Cash flow: -5,000 500 2,000 3,000 1,500 500

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 NPV decision rule to evaluate this project; should it be accepted or rejected?

Which of the following statements regarding payback (PB) is/are true?

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 PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

A project's IRR is the interest rate that

How many possible IRRs could you find for the following set of cash flows? Time 0 1 2 3 4 Cash Flow -\ 15,000 \ 6,000 \ 10,000 \ 12,000 \ 1,000

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as

Neither payback period nor discounted payback period techniques for evaluating capital projects account for

The MIRR statistic is different from the IRR statistic in that

The benchmark for the profitability index (PI) is the

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?

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 9 percent and the maximum allowable payback is four years. Time: 0 1 2 3 4 5 Cash flow: -1,000 -75 100 100 0 2,000

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 PI 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

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 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 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 discounted payback 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