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

What is the NPV of a project that required a net investment of $500,00 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%.

In considering the payback method,

In considering the payback period:

Using the profitability index, which of the following projects should be accepted?

Indexx, a maker of disease-detection systems based on biotechnology is considering purchasing some diagnostic equipment that costs $380,000. Shipping and installation costs will be an additional $30,000. The equipment will be depreciated based on a 3-year MACRS life. Revenues from the new equipment should be $400,000 the first year and increase 15% each year over the expected 5-year economic life. Operating expenses should be $250,000 the first year and these expenses will increase 10% each year. At the end of 5 years the equipment will be obsolete and have no salvage value. Should Indexx invest in this new equipment? Assume Indexx has a cost of capital of 15% and a marginal tax rate of 40%. Use the depreciation schedule listed below: (3 Year Depreciation Schedule: 33.33%, 44.45%, 14.81%, 7.41%)

The internal rate of return does not take into account the

Entrepreneurial firms with a net worth of less than $1 million tend to prefer the ____ method for evaluating capital expenditures.

Generally, the existence of a(n) ____ option reduces the downside risk of a project and should be considered in project analysis.

What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000; Year 2 = $20,000; Year 3 = $25,000; Year 4 = $30,000?

The reasons that the amount and timing of the net cash flows to the foreign subsidiary and parent may differ include:

A capital expenditure project has an expected 20 percent internal rate of return and a $10,000 net present value. It has one cash flow sign change.

Which of the following statements about comparing the techniques of net present value (npv) and internal rate of return (irr) is/are correct? I. The net present value assumes that all cash flows are reinvested at the cost of capital and is therefore realistic. II. The internal rate of return is stated as a percent and is therefore easy to communicate to decision-makers who may not understand the fine points of finance.

Rollerblade, a manufacturer of skating gear, plans to expand its operation in Brighton, England. The expansion will cost $18.5 million and is expected to generate annual net cash flows of 2.2 million pounds for a period of 15 years and nothing thereafter. The cost of capital for the project is 16%. Using the spot exchange rate of $1.60 per British pound, compute the net present value of the expansion project.

The disadvantages of the payback approach include:

All of the following are reasons why a firm may face capital rationing except:

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?

Which of the following statements about comparing capital budget techniques is/are correct? I. The payback period is easy to understand and helps the firm identify how long it will be unable to use the initial investment for other projects. II. Mutually exclusive projects allow a firm to do other like projects (mutually exclusive) simultaneously as long as the budget restraints are met.

How does the profitability index differ from the net present value and when would each method be preferred?

Should the following project be accepted if the cost of capital is 12%? Initial Investment is $50,000

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