Exam 12: Capital Budgeting: Decision Criteria and Real Option Considerations

Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years. What is the NPV of this project if Kinetics cost of capital is 14%?

Based upon the following cash flows, should Ooey Gooey Candy Makers introduce a new product, Skinny Minnie Diet Cuisine? The initial investment is $780,000, and the cost of capital is 12.2%. ? Years Cash Flows 1 \ 90,000 2 \ 105,000 3 \ 105,000 4 \ 195,000 5 \ 195,000 6 \ 195,000

The profitability index (PI) approach ____.

A project requires a net investment of $450,000. It has a profitability index of 1.25 based on the firm's 12% cost of capital. Determine the net present value of the project.

The reason for a post-audit is to ____.

The profitability index would be ____ if the present value of the net cash flows (NCF) over the life of a project were ____.

The disadvantages of the payback approach include ____.

In comparing the techniques of net present value and internal rate of return: I. The NPV and IRR techniques will generate the same accept-reject decision provided the projects have conventional cash flows. II. The differences between the underlying assumptions of NPV and IRR can cause them to rank projects differently.

Which of the following is NOT a technique to handle the capital rationing problem?

A firm's capital expenditures may be limited due to externally imposed constraints. All but which of the following are external constraints?

Using the profitability index, which of the following mutually exclusive projects should be accepted? Project A: NPV = $6,000; NINV = $50,000 Project B: NPV = $10,000; NINV = $120,000 Project C: NPV = $8,000; NINV = $80,000

GoFlo is a small growing firm that is considering the purchase of another truck to serve GoFlo's expanding customer base. The new truck will cost $21,000 and should generate annual net cash flows of $6,000 over the truck's 5-year life. What is the payback period for this project?

A negative net present value project that may ultimately lead to a highly positive net present value project is called a(n) ____ option.

____ options give a firm the ability to temporarily stop a project in order to avoid negative cash flows..

Input flexibility, output flexibility, and expansion options are the three types of ____ options.

With the net present value approach, all net cash flows are discounted at the ____.

Colex wishes to bid on a contract that is expected to yield after-tax net cash flows of $25,000 in year 1, $30,000 in year 2, and $35,000 per year in years 3-8. To obtain the contract, Colex will need to invest $110,000 to reconfigure a packaging system, $20,000 (after-tax) to retrain current employees, and $15,000 (after-tax) on an environmental impact study that is required to be completed on acceptance of the contract. What is the project's internal rate of return?

Ecogen is considering the purchase of some new equipment that will cost $340,000 installed. The equipment will produce a product that must be FDA approved and this will require at least a year. Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2. Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years. At the end of 5 years the equipment and the product will be obsolete. If the firm's marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment?

Barnacle Bob's Fish and Tackle Shop is planning an expansion. The initial investment is $480,000, and anticipated cash inflows are as listed below. The cost of capital is 12.2%. Based on the profitability index, should Barnacle Bob go ahead with the project? ? Years Cash Inflows 1 \ 90,000 2 105,000 3 105,000 4 195,000 5 195,000 6 195,000

The ____ is interpreted as the ____ for each dollar of initial investment.