Exam 10: Capital Budgeting: Decision Criteria and Real Option Considerations

The of an investment is the period of time for the to equal the initial cash outlay.

A project requires a net investment of $100,000.At the firm's cost of capital of 10%, the project's profitability index is 1.15.Determine the net present value of the project.

List the advantages and disadvantages of the payback method.

The reason for a postaudit is to

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

Why is the net present value method of evaluating projects better than the internal rate of return method?

What is the internal rate of return for a project that has a net investment of $76,000 and net cash flows of $20,507 per year for 7 years?

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

What is the internal rate of return for a project that has a net investment of $370,000 and net cash flows of $60,000 in year 1, $75,000 in year 2, and $85,000 in years 3 through 8?

According to the profitability index criterion, a project is acceptable if its profitability index is

What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000;Year 2 = $20,000;Year 3 = $25,000;Year 4 = $30,000?

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

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

The profitability index (PI) approach:

G-III Apparel is considering increasing the size of a warehouse.The cost of the expansion is $825,000 and the increase in inventories and accounts payable will be $410,000 and $360,000 respectively.G-III expects that the expansion will increase net cash flows by $150,000 a year for the next 5 years and $200,000 a year for years 6-12.G-III has a 14% cost of capital and a marginal tax rate of 35%.What is the NPV of the warehouse expansion?

The net present value method assumes that the cash flows over the life of the project are reinvested at

Real options in capital budgeting can be classified in all of the following ways except:

TexMex is considering replacing its tortilla machine with a new model that sells for $46,000 including the cost of installation.The old machine has been fully depreciated and has a $0 salvage value.The new machine will be depreciated as a 3-year MACRS asset.Revenues are expected to increase $18,000 per year over the 5 year life of the new machine.At the end of 5 years the new machine is expected to have no salvage value.What is the IRR for this project if TexMex has a required rate of return of 14% and a marginal tax rate of 40%? Operating costs are not expected to increase from the current level of $8,000 per year.

The value additivity principle indicates that, when a firm undertakes an independent project, the value of the firm is increased by the from the project.

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 percent.