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.

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 $110,0000 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?

Calculate the net present value for an investment project with the following cash flows using a 12 percent cost of capital:

Which of the following investment decision rules (if any) assumes that the cash flows generated are reinvested over the life of the project at the firm's cost of capital?

The "value additivity principle" means that the

One weakness of the internal rate of return approach is that:

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

The profitability index (PI) approach:

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

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?

Which of the following would increase the net present value of a project?

Multiple internal rates of return can occur when there is (are):

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.

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.

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 internal rate of return for the project (to the nearest tenth of one percent).

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

The profitability index is the ratio of the ____ to the ____.

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.

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

The payback method has all of the following advantages EXCEPT: