Exam 10: Capital-Budgeting Techniques and Practice

A machine that costs $1,500,000 has a 3-year life.It will generate after-tax annual cash flows of $700,000 at the end of each year.It will be salvaged for $200,000 at the end of year 3.If your required rate of return for the project is 13%,what is the NPV of this investment?

Project Alpha has an internal rate of return (IRR)of 15 percent.Project Beta has an IRR of 14 percent.Both projects have a required return of 12 percent.Which of the following statements is MOST correct?

Mutually exclusive projects have more than one IRR.

You are in charge of one division of Yeti Surplus Inc.Your division is subject to capital rationing.Your division has 4 indivisible projects available,detailed as follows: If you must select projects subject to a budget constraint of 5 million dollars,which set of projects should be accepted so as to maximize firm value?

A significant advantage of the payback period is that it

The internal rate of return is the discount rate that equates the present value of the project's free cash flows with the project's initial cash outlay.

Your company is considering a project with the following cash flows: Initial Outlay = $3,000,000 Cash Flows Year 1-8 = $547,000 Compute the internal rate of return on the project.

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.The firm's required rate of return for these projects is 10%.The net present value for Project A is

A project with a NPV of zero should be rejected since even the returns on U.S.Treasury bills are greater than zero.

The internal rate of return will equal the discount rate when the net present value equals zero.

What is the difference between the IRR and the MIRR?

Two projects that have the same cost and the same expected cash flows will have the same net present value.

DYI Construction Co.is considering a new inventory system that will cost $750,000.The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one,$325,000 in year two,$150,000 in year three,and $180,000 in year four.DYI's required rate of return is 8%.What is the net present value of this project?

What are mutually exclusive projects? How might they complicate the capital-budgeting process?

If a project has multiple internal rates of return,the lowest rate should be used for decision-making purposes.

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The internal rate of return for Project A is

The profitability index is the ratio of the company's net income (or profits)to the initial outlay or cost of a capital budgeting project.

DYI Construction Co.is considering a new inventory system that will cost $750,000.The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one,$325,000 in year two,$150,000 in year three,and $180,000 in year four.DYI's required rate of return is 8%.What is the internal rate of return of this project?

A project's equivalent annual annuity (EAA)is the annuity cash flow that yields the same present value as the project's NPV.

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The modified internal rate of return for Project A is