Exam 10: Capital-Budgeting Techniques and Practice

Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.The internal rate of return for Project B is

If a project is acceptable using the NPV criterion,then it will also be acceptable using the discounted payback period since both methods use discounted cash flows to make the accept/reject decision.

Your company is considering a project with the following cash flows: Initial Outlay = $3,000,000 Cash Flows Year 1-8 = $547,000 Compute the internal rate of return on the project.

What is the payback period for a project with an initial investment of $180,000 that provides an annual cash inflow of $40,000 for the first three years and $25,000 per year for years four and five,and $50,000 per year for years six through eight?

One drawback of the payback method is that some cash flows may be ignored.

The internal rate of return is the discount rate that equates the present value of the project's free cash flows with the project's initial cash outlay.

Two potential approaches to capital budgeting decision problems are a deterministic approach and a probabilistic approach.

Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.The equivalent annual annuity amount for project A is

A significant disadvantage of the payback period is that it

Zellars,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Zellars,Inc.'s required rate of return for these projects is 10%.The profitability index for Project A is

When capital rationing exists,the divisibility of projects is ignored and projects are funded in order of their PI's or IRR's.

Because the NPV and PI methods both yield the same accept/reject decision,a company attempting to rank capital budgeting projects for funding consideration can use either method and get the same results.

A capital budgeting project has a net present value of $30,000 and a modified internal rate of return of 15%.The project's required rate of return is 13%.The internal rate of return is

If the net present value of a project is zero,then the profitability index will equal one.

Simplicity Printers is considering a project with the following cash flows: Initial Outlay = $126,000 Cash Flows: Year 1 = $44,000 Year 2 = $59,000 Year 3 = $64,000 If the appropriate discount rate is 11.5%,compute the NPV of this project.

A significant disadvantage of the internal rate of return is that it

The Meacham Tire Company is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below. The required rate of return on these projects is 14 percent.What decision should be made? As part of your answer,calculate the NPV assuming a replacement chain for Project S,and also calculate the equivalent annual annuity for each project.

Capital rationing may be imposed because of all of the following except:

The capital budgeting manager for XYZ Corporation,a very profitable high technology company,completed her analysis of Project A assuming 5-year depreciation.Her accountant reviews the analysis and changes the depreciation method to 3-year depreciation.This change will

Rent-to-Own Equipment Co.is considering a new inventory system that will cost $750,000.The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one,$325,000 in year two,$150,000 in year three,and $180,000 in year four.Rent-to-Own's required rate of return is 8%.What is the modified internal rate of return of this project?