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

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 Project A Cash Flow -20,000 10,000 30,000 Project B Cash Flow -30,000 10,000 20,000 50,000

A disadvantage of the payback statistic is that:

A financial asset will pay you $50,000 at the end of 20 years if you pay premiums of $975 per year at the end of each year for 20 years. What is the IRR of this financial asset?

Compute the MIRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time: 0 1 2 3 4 5 Cash flow: -175 75 0 100 75 50

Compute the PI statistic for Project Q and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent. Time 0 1 2 3 4 5 Cash Flow -\ 1,000 \ 250 \ 180 \ 420 \ 300 \ 100

Compute the NPV statistic for Project U given the following cash flows if the appropriate cost of capital is 9 percent. Time 0 1 2 3 4 5 Cash Flow -\ 1,000 \ 350 \ 1,480 -\ 520 \ 400 \ 100

A graph of a project's ________ is a function of cost of capital.

Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years. Time: 0 1 2 3 4 5 Cash flow: -5,000 500 2,000 3,000 1,500 500

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

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 three and a half years, respectively. Use the 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

Which of the following is incorrect regarding the IRR statistic?

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

Rate-based statistics represent summary cash flows, and these summaries tend to lose which two important details?

A company is considering two mutually exclusive projects, A and B Project A requires an initial investment of $100, followed by cash flows of $95, $20, and $5. Project B requires an initial investment of $100, followed by cash flows of $0, $20, and $130. What is the IRR of the project that is best for the company's shareholders? The firm's cost of capital is 10 percent.

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

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 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. Time 0 1 2 3 4 5 Cash Flow -125,000 65,000 78,000 105,000 105,000 25,000

Which of the following statements is correct regarding the NPV profile?

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 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 discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?