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

Generally, the ____ is considered to be a more realistic reinvestment rate than the ____.

When two or more normal ____ projects are under consideration, the profitability index, the net present value, and the internal rate of return methods will yield identical accept/reject signals.

Using the profitability index, which of the following mutually exclusive projects should be accepted? Project A: NPV = $6,000; NINV = $50,000 Project B: NPV = $10,000; NINV = $120,000 Project C: NPV = $8,000; NINV = $80,000

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

Explain why the internal rate of return method is more popular than the net present value method. What are some potential problems with relying on the IRR method?

An investment project requires a net investment of $100,000 and is expected to generate annual net cash inflows of $25,000 for 6 years. The firm's cost of capital is 12 percent. Determine the profitability index for this project.

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

Consider a capital expenditure project that has forecasted revenues equal to $32,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9,000. The equipment's $23,000 cost will be depreciated on a straight-line basis to $0 over a 10-year estimated economic life. Assume that the project requires an initial $7,000 working capital investment. The company's marginal tax rate is 30%. Calculate the project's net present value using a 12% discount rate.

The profitability index would be ____ if the present value of the net cash flows (NCF) over the life of a project were ____.

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

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?

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 reason for a postaudit is to

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

A weakness of the payback period is that it disregards:

What is the net present value of a project that requires a net investment of $76,000 and produces net cash flows of $22,000 per year for 7 years? Assume the cost of capital is 15 percent.

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%?

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.

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

Which of the following is not a technique to handle the capital rationing problem?