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

Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively. Time 0 1 2 3 Project A Cash Flow -5,000 1,000 3,000 5,000 Project B Cash Flow -10,000 5,000 5,000 5,000 Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively. Time 0 1 2 3 Project A Cash Flow -1,000 300 400 700 Project B Cash Flow -500 200 400 300

Which of the following is 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?

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. Time 0 1 2 3 4 5 Cash Flow -100,000 30,000 45,000 55,000 30,000 10,000

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as:

All of the following capital budgeting tools are suitable for firms facing time constraints EXCEPT:

A project has normal cash flows. Its IRR is 15 percent and its cost of capital is 10 percent. Which of the following statements is incorrect?

Compute the MIRR statistic for Project I and note whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of

A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as:

Suppose your firm is considering investing in a project with the cash flows shown as follows, 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? Time 0 1 2 3 4 5 6 Cash Flow -\ 5,000 \ 1,200 \ 1,400 \ 1,600 \ 1,600 \ 1,100 \ 2,000

Which of these describe groups or pairs of projects where you can accept one but not all?

Projects A and B are mutually exclusive. Project A costs $10,000 and is expected to generate cash inflows of $4,000 for four 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 percent. Which project would you accept and why?

How many possible IRRs could you find for the following set of cash flows?

Which of the following statements is correct?

All of the following are strengths of NPV EXCEPT:

The net present value decision technique uses a statistic denominated in:

Suppose your firm is considering investing in a project with the cash flows shown as follows, 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 three and a half and four and a half years, respectively. Use the discounted payback decision to evaluate this project; should it be accepted or rejected? Time 0 1 2 3 4 5 6 4 Cash Flow -\ 85,000 \ 12,000 \ 11,000 \ 13,000 \ 21,000 \ 31,000 \ 32,000

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. Time 0 1 2 3 4 5 Cash Flow -100,000 30,000 45,000 55,000 30,000 10,000

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. Time 0 1 2 3 Project A Cash Flow -20,000 10,000 30,000 1,000 Project B Cash Flow -30,000 10,000 20,000 50,000 Use the payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 10 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three and a half years, respectively. Time 0 1 2 3 Project A Cash Flow -1,000 300 400 700 Project B Cash Flow -500 200 400 300