Exam 10: Capital-Budgeting Techniques and Practice

Consider a project with the following information: Initial outlay = $1,500 Compute the profitability index if the company's discount rate is 10%.

For the net present value (NPV)criteria,a project is acceptable if NPV is ________,while for the profitability index a project is acceptable if PI is ________.

If a project is acceptable using the NPV criterion,then it will also be acceptable using the discounted payback period since both methods use discounted cash flows to make the accept/reject decision.

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 net present value for Project B is

The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below. Calculate the equivalent annual annuity for each project assuming a required return of 15%.What decision should be made?

If a firm imposes a capital constraint on investment projects,the appropriate decision criterion is to select the set of projects that has the highest positive net present value subject to the capital constraint.

Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project W and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments,

The disadvantage of the IRR method is that

If two projects are mutually exclusive,then the IRR is more important than the NPV in deciding the project that should be chosen.

You are considering investing in a project with the following year-end after-tax cash flows: Year 1: $57,000 Year 2: $72,000 Year 3: $78,000 If the initial outlay for the project is $185,000,compute the project's internal rate of return.

The most critical aspect in determining the acceptability of a capital budgeting project is the impact the project will have on the company's net income over the projects entire useful life.

Your firm is considering investing in one of two mutually exclusive projects.Project A requires an initial outlay of $3,500 with expected future cash flows of $2,000 per year for the next three years.Project B requires an initial outlay of $2,500 with expected future cash flows of $1,500 per year for the next two years.The appropriate discount rate for your firm is 12% and it is not subject to capital rationing.Assuming both projects can be replaced with a similar investment at the end of their respective lives,compute the NPV of the two chain cycle for Project A and three chain cycle for Project B.

The internal rate of return is

The profitability index is the ratio of the present value of the future free cash flows to the initial investment.

A one-sign-reversal project should be accepted if it

A significant disadvantage of the payback period is that it

When capital rationing exists,the divisibility of projects is ignored and projects are funded in order of their PI's or IRR's.

The net present value of a project will increase as the required rate of return is decreased (assume only one sign reversal).

Calculating the modified internal rate of return on an Excel spreadsheet involves the use of the IRR function multiple times,once using the financing rate,and once using the reinvestment rate.

D&B Contracting plans to purchase a new backhoe.The one under consideration costs $233,000,and has a useful life of 8 years.After-tax cash flows are expected to be $31,384 in each of the 8 years and nothing thereafter.Calculate the internal rate of return for the grader.