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

What is the net present value of a project that requires a net investment of $76,000 and produces net cash flows of $22,000 per year for 7 years? Assume the cost of capital is 15%.

An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12%. Determine the payback period for the project.

Which of the following statements about comparing the techniques of net present value (NPV) and internal rate of return (IRR) is (are) correct? I. The net present value assumes that all cash flows are reinvested at the cost of capital and is therefore realistic. II. The internal rate of return is stated as a percent and is therefore easy to communicate to decision-makers who may not understand the fine points of finance.