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

Hydroponics is considering adding another greenhouse that would cost $95,000 and generate $20,000 in annual net cash flows over it's 8 year expected life. The greenhouse would be depreciated on a straight-line basis to zero and the salvage value is also expected to be zero. If the firm has a marginal tax rate of 40 percent, what is this project's internal rate of return?

List the advantages and disadvantages of the payback method.

With the net present value approach, all net cash flows are discounted at the

The ____ approach takes into account both the magnitude and timing of cash flows over the entire life of a project in measuring its economic desirability.

Turntec is considering replacing an automatic shuttle machine that has a book value of $2,000 and a $0 market value with a more efficient machine that will cost $24,000. The annual net cash flows from the new equipment are expected to be $6,000 for the next 6 years. What is the net present value of this project? Assume the firm's cost of capital is 12 percent and it's marginal tax rate is 40 percent.

What is the net present value of the following project if the required rate of return is 15%? The initial investment is $150,000

Barnacle Bob's Fish and Tackle Shop is planning an expansion. The initial investment is $480,000 and anticipates cash inflows as listed below. The cost of capital is 12.2%. Based on the profitability index, should Barnacle Bob go ahead with the project?

There are many reasons why a firm can earn above-normal profits. These reasons include all of the following except:

What is the net present value of a project that has a net investment of $148,000 and net cash flows of $25,000 in the first year, $45,000 in years 2-7 and a negative net cash flow of $27,000 in year 8? Assume the cost of capital is 11 percent.

What is the internal rate of return for a project that has a net investment of $14,600 and a single net cash flow of $25,750 in 5 years?

The relationship between NPV and IRR is such that:

What is the internal rate of return for a project that has a net investment of $150,000 and net cash flows of $40,000 for 5 years?

According to the profitability index criterion, a project is acceptable if its profitability index is

Why is the net present value method of evaluating projects better than the internal rate of return method?

Decode Genetics purchased lab equipment for $600,000 that will generate net cash flows of $130,000 per year for 10 years. What is the IRR for this project?

Based upon the following cash flows, should Chipper Nipper Cookie Company introduce a new product, Rolling In Dough Pies? The initial investment is $180,000 and the cost of capital is 11.5%. Years $\quad$ Cash Flows 1 $\quad$$\quad$$\quad$ $80,000 2 $\quad$$\quad$$\quad$ 95,000 3 $\quad$$\quad$$\quad$ 95,000 4 $\quad$$\quad$$\quad$ 110,000 5 $\quad$$\quad$$\quad$ 110,000 6 $\quad$$\quad$$\quad$ 110,000

If the net present value of an investment project is positive then the:

The objective in solving capital rationing problems is to:

Real options in capital budgeting can be classified. The classification that means that the project is delayed and can be termed "waiting to invest" is:

What is the internal rate of return for a project that has a net investment of $169,165 and net cash flows of $25,000 in the first year and 40,000 in years 2-7?