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

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

Projects A and B are mutually exclusive. Project A costs $20,000 and is expected to generate cash inflows of $7,500 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?

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 Cash Flow -\ 5,000 \ 1,200 \ 1,400 \ 1,600 \ 1,600 \ 1,100 \ 2,000

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

A company is considering two mutually exclusive projects, A andB. 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.

Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return?

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

A company is considering two mutually exclusive projects, A andB. Project A requires an initial investment of $200, followed by cash flows of $185, $40, and $15. Project B requires an initial investment of $200, followed by cash flows of $0, $50, and $230. 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 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 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 Cash -\ 5,000 \ 1,200 \ 1,400 \ 1,600 \ 1,600 \ 1,100 \ 2,000 Flow

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 Cash -85,000 \ 12,000 \ 11,000 \ 13,000 \ 21,000 \ 31,000 \ 32,000 Flow

Compute the NPV for Project X and 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: -75 -75 0 100 75 50

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?

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 -\ 5,000 \ 1,200 \ 1,400 \ 1,600 \ 1,600 \ 1,100 \ 2,000 Flow

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 IRR decision to evaluate this project; should it be accepted or rejected? Time 0 1 2 3 4 5 6 Cash Flow -85,000 \ 12,000 \ 11,000 \ 13,000 \ 21,000 \ 31,000 \ 32,000

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?

Compute the IRR 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 9 percent. Time: 0 1 2 3 4 5 Cash flow: -1000 -75 100 100 0 2000

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

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