Exam 13: Weighing Net Present Value and Other Capital Budgeting Criteria

Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to generate cash inflows of $4,000 for 4 years. Project B costs $10,000 and is expected to generate a single cash flow in year 4 of $20,000. The cost of capital is 12%. Which project would you accept and why?

A capital budgeting technique that converts a project's cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule.

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.

Compare and contrast the IRR and the MIRR statistic.

Explain the Rule of Signs as it pertains to IRR.

Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 10 percent.

A financial asset will pay you $10,000 at the end of 10 years if you pay premiums of $175 per year at the end of each year for 10 years. What is the IRR of this financial asset?

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3 and 3.5 years, respectively. Use the payback decision to evaluate this project; should it be accepted or rejected?

Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Explain the differing reinvestment rate assumptions of NPV and IRR.

The Net Present Value decision technique may not be the only pertinent unit of measure if the firm is facing

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected?

For a project with normal cash flows, what would you expect the relationship to be between the MIRR and the IRR?

Compute the Payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 9 percent and the maximum allowable payback is 4 years.

Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Compute the Discounted Payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is 3 years.

Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Which of the following statements is correct?

Use the NPV decision rule to evaluate this project; should it be accepted or rejected?