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

Why are there differences in the capital expenditure analysis practice between large and entrepreneurial firms?

The Atlantic Company plans to open a new branch office in a suburban area.The building will cost $200,000 and will be depreciated (on a straight-line basis) over a 20 year life to a $0 estimated salvage value.Equipment for the building will cost an additional $100,000.This equipment has a 20-year life and will be depreciated on a straight-line basis to a $0 estimated salvage value.The branch office is expected to generate additional before tax net income of $30,000 per year.The tax rate is 40 percent and the cost of capital is 12 percent.Compute the net present value for the project.

The internal rate of return does not take into account 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?

Based upon the following cash flows, should Chipper Nipper Cookie Company introduce a new product, Rolling In Dough Pies? The initial investment is $180,000 and the cost of capital is 11.5%. Years Cash F1aws 1 80,000 2 95,000 3 95,000 4 110,000 5 110,000 6 110,000

When evaluating international capital expenditure projects, the analyst may compute the present value of the net cash flows in the local currency and then .

The "value additivity principle" means that the

Zimmer, a manufacturer of modular rooms, plans to expand its operation in Landshut, Germany.The expansion will cost $14.5 million and is expected to generate annual net cash flows of DM4.5 million for a period of 12 years and then the operation will be sold for DM2 million.The cost of capital for the project is 14%.Using the spot exchange rate of $0.60 per DM, compute the NPV of this expansion project.

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 percent.Determine the payback period for the project.

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?

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.

Using the profitability index, which of the following projects should be accepted? Praject M: NPV =\ 60,000 NINV =\ 200,000 Praject N: NPV=\ 10,000 NINV =\ 30,000 Praject 0: NPV=\ 2,000 NINV =\ 5,000

In working with capital budgeting, what does a post-audit do?

If the net present value of an investment project is positive then the:

Would you invest in a project that has a net investment of $14,600 and a single net cash flow of $24,900 in 5 years, if your required rate of return was 12 percent?

The advantages of the payback approach include all of the following except:

The payback method has all of the following advantages EXCEPT:

Calculate the net present value for an investment project with the following cash flows using a 12 percent cost of capital: Year 0 1 2 3 Net Cash Flow -\ 100,000 \ 80,000 \ 80,000 -\ 30,000

The internal rate of return method assumes that the cash flows over the life of the project are reinvested at:

The payback period can be considered justified on the basis of: