Exam 10: Capital-Budgeting Techniques and Practice

Project ZZQ requires an initial outlay of $500,000 and has a profitability index of 1.4.The project is expected to generate equal annual cash flows over the next ten years.The required return for this project is 16%.What is project ZZQ's internal rate of return?

Initial Outlay Cash Flow in Period The Internal Rate of Return (to nearest whole percent)is:

If a project's IRR is equal to its required return,then the project's NPV is equal to zero and its PI is equal to one.

Positive NPV projects may be rejected when capital must be rationed.

What is the net present value's assumption about how cash flows are reinvested?

If a project is acceptable using the net present value criteria,then it will also be acceptable under the less stringent criteria of the payback period.

For the net present value (NPV)criteria,a project is acceptable if NPV is ________,while for the profitability index a project is acceptable if PI is ________.

Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.

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 modified internal rate of return for Project A is

The payback period may be more appropriate to use for companies experiencing capital rationing.

Finance theory suggests that the IRR criterion is the most favorable capital budgeting decision tool.

Your firm is considering an investment that will cost $920000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's net present value?

A project's net present value profile shows how sensitive the project is to the choice of a discount rate.

If a project is acceptable using the NPV criteria,it will also be acceptable when using the profitability index and IRR criteria.

The capital budgeting decision-making process involves measuring the incremental cash flows of an investment proposal and evaluating the attractiveness of these cash flows relative to the project's cost.

The net present value of a project will increase as the required rate of return is decreased (assume only one sign reversal).

All of the following are criticisms of the payback period criterion except:

When reviewing the net present profile for a project

Which of the following statements about the internal rate of return (IRR)is true?

The net present value profile clearly demonstrates that the NPV of a project increases as the discount rate increases.