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

Compute the MIRR for Project Y and 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: -5000 1000 1000 0 2000 2000

We accept projects with a positive NPV because it means that:

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

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:

Compute the payback statistic for Project X 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 10 percent and the maximum allowable payback is five years. Time: 0 1 2 3 4 5 Cash flow: -75 -75 0 100 75 50

Which of the following is incorrect regarding the IRR statistic?

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?

Compute the payback statistic for Project X 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 9 percent and the maximum allowable payback is four years. 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 NPV 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 statistics for the project are three and a half and four and a half years, respectively. Use the PI 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 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 Use the discounted payback decision rule to evaluate these projects; which one(s) should be accepted or rejected?

All of the following are strengths of NPV EXCEPT:

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

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

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?

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

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 MIRR decision rule to evaluate this project; should it be accepted or rejected?

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project?

Which of the following tools is suitable for choosing between mutually exclusive projects?