Exam 10: Capital-Budgeting Techniques and Practice

Different discounted cash flow evaluation methods may provide conflicting rankings of investment projects when

Mutually exclusive projects occur when

A project with a payback period of four years is acceptable as long as the company's target payback period is greater than or equal to four years.

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 internal rate of return of this project?

If a project's profitability index is less than one then the project should be rejected.

Capital rationing generally leads to higher stock prices as management is doing the best job it can in selecting only the best capital budgeting projects.

For any individual project,if the project is acceptable based on its internal rate of return,then the project will also be acceptable based on its modified internal rate of return.

Both the profitability index (PI)and net present value (NPV)are based on the present value of all future free cash flows,but the PI is a relative measure while the NPV is an absolute measure of a project's desirability.

Any project deemed acceptable using the discounted payback period will also be acceptable if using the traditional payback period.

The profitability index provides an advantage over the net present value method by reporting the present value of benefits per dollar invested.

D&B Contracting plans to purchase a new backhoe.The one under consideration costs $233,000,and has a useful life of 8 years.After-tax cash flows are expected to be $31,384 in each of the 8 years and nothing thereafter.Calculate the internal rate of return for the grader.

Project C requires a net investment of $1,000,000 and has a payback period of 5.6 years.You analyze Project C and decide that Year 1 free cash flow is $100,000 too low,and Year 3 free cash flow is $100,000 too high.After making the necessary adjustments

The main disadvantage of the NPV method is the need for detailed,long-term forecasts of free cash flows generated by prospective projects.

The disadvantage of the IRR method is that:

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

Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives?

When several sign reversals in the cash flow stream occur,a project can have more than one IRR.

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 net present value of this project?

Kingston Corp.is considering a new machine that requires an initial investment of $480,000 installed,and has a useful life of 8 years.The expected annual after-tax cash flows for the machine are $89,000 for each of the 8 years and nothing thereafter. a.Calculate the net present value of the machine if the required rate of return is 11 percent. b.Calculate the IRR of this project. c.Should Kingston accept the project (assume that it is independent and not subject to any capital rationing constraint)? Explain your answer.

If the NPV (Net Present Value)of a project with one sign reversal is positive,then the project's IRR (Internal Rate of Return)________ the required rate of return.