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

Decode Genetics purchased lab equipment for $600,000 that will generate net cash flows of $130,000 per year for 10 years.What is the IRR for this project?

The disadvantages of the payback approach include:

All of the following are reasons why a firm may face capital rationing except:

Which of the following statements about comparing capital budget techniques is/are correct?

If a net present value analysis for a normal project gives an NPV greater than zero, an internal rate of return calculation on the same project would yield an internal rate of return the required rate of return for the firm.

Sigma is thinking about purchasing a new clam digger for $14,000.The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in the 2nd year, $5,000 in the 3rd year, and $3,000 in the 4th year.Should Sigma purchase this digger if its cost of capital is 12 percent?

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

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

The measures the present value return for each dollar of initial investment.

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 Flare 1 190,000 2 105,000 3 105,000 4 195,000 5 195,000 0 195,000

The payback period of an investment is defined as:

In comparing the techniques of net present value and internal rate of return:

In the case of mutually exclusive projects, NPV and PI are likely to yield conflicting decisions when:

What is the NPV of a project that required a net investment of $500,00 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%.

Real options in capital budgeting can be classified.The classification that means that the project is delayed and can be termed "waiting to invest" is:

Calculate the profitability index for a project that has a net present value equal to -$10,000.The project's net investment is $20,000, and the firm has a 40 percent marginal tax rate.

In considering the payback method,

In the absence of capital rationing, the method is normally superior to the method when choosing among mutually exclusive investments.

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%?

When dealing with cash flows, the is computed by trial and error.