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

The relationship between NPV and IRR is such that ____.

What is the net present value of a project that has a net investment of $148,000 and net cash flows of $25,000 in the first year, $45,000 in years 2-7, and a negative net cash flow of $27,000 in year 8? Assume the cost of capital is 11%.

An investment project requires a net investment of $100,000 and is expected to generate annual net cash inflows of $25,000 for 6 years. The firm's cost of capital is 12%. Determine the profitability index for this project.

Generally, the existence of a(n) ____ option reduces the downside risk of a project and should be considered in project analysis.

When two or more normal ____ projects are under consideration, the profitability index, the net present value, and the internal rate of return methods will yield identical accept/reject signals.

The internal rate of return does NOT take into account the ____.

The payback period of an investment is defined as ____.

The "value additivity principle" means that the ____.

The payback method is at best a crude measure of the risk of a project because it fails to consider the ____ of a project's returns.

If a capital expenditure project has an expected 20% internal rate of return, and a $10,000 net present value, and one cash flow sign change, then which one of the following statements about the project is true?

A digital assembly system that costs $160,000 is expected to operate for 8 years. The estimated salvage value at the end of 8 years is $12,000. The system is expected to save the company $38,000 in labor costs before taxes and depreciation. The company will depreciate this system on a 5-year MACRS schedule. If the firm's cost of capital is 12% and its marginal tax rate is 35%, compute the NPV for the project. (Note: Requires MACRS tables.)

Real options in capital budgeting can be classified in all of the following ways EXCEPT ____.

Which of the following would increase the net present value of a project?

Red Lake Mines Inc. is considering adoption of a new project requiring a net investment of $10 million. The project is expected to generate 5 years of net cash inflows of $5 million per year. In the project's sixth and final year, it is expected to have a net cash outflow of $1 million. What is the project's net present value, using a discount rate of 12%?

The payback period can be considered justified for which of the following reasons?

When considering projects for implementation, management generally has three options. All of the following reflect possible managerial options EXCEPT that management could ____.

Hydroponics is considering adding another greenhouse that would cost $95,000 and generate $20,000 in annual net cash flows over its 8-year expected life. The greenhouse would be depreciated on a straight-line basis to zero, and the salvage value is also expected to be zero. If the firm has a marginal tax rate of 40%, what is this project's internal rate of return?

The ____ approach takes into account both the magnitude and timing of cash flows over the entire life of a project in measuring its economic desirability.

ZPS Models is considering a project that has a NINV of $564,000 and generates net cash flows of $105,000 per year for 10 years. What is the NPV of this project if ZPS has a cost of capital of 12.45%?

The reasons that the amount and timing of the net cash flows to the foreign subsidiary and parent may differ include ____.