Exam 10: Capital-Budgeting Techniques and Practice

A project would be acceptable if

A machine that costs $1,500,000 has a 3-year life.It will generate after tax annual cash flows of $700,000 at the end of each year.It will be salvaged for $200,000 at the end of year 3.If your required rate of return for the project is 13%,what is the NPV of this investment?

We compute the profitability index of a capital budgeting proposal by

Mutually exclusive projects have more than one IRR.

If a project's internal rate of return is greater than the project's required return,then the project's profitability index will be greater than one.

NPV may be calculated on an Excel spreadsheet simply by entering the project's free cash flows into Excel's NPV function.

Because the MIRR assumes reinvestment at the cost of capital while IRR assumes reinvestment at the project's IRR,the MIRR will always be less than the IRR.

If project A generates $10 million of free cash flow over its five year useful life and project B generates $8 million of free cash flow over its useful life,then Project A will have a shorter payback period than Project B,assuming both projects require the same initial investment.

Company K is considering two mutually exclusive projects.The cash flows of the projects are as follows: a.Compute the NPV and IRR for the above two projects,assuming a 13% required rate of return. b.Discuss the ranking conflict. c.What decision should be made regarding these two projects?

Determine the five-year equivalent annual annuity of the following project if the appropriate discount rate is 16%: Initial Outflow = $150,000 Cash Flow Year 1 = $40,000 Cash Flow Year 2 = $90,000 Cash Flow Year 3 = $60,000 Cash Flow Year 4 = $0 Cash Flow Year 5 = $80,000

Consider two mutually exclusive projects X and Y with identical initial outlays of $600,000 and useful lives of 5 years.Project X is expected to produce an after-tax cash flow of $180,000 each year.Project Y is expected to generate a single after-tax net cash flow of $1,015,000 in year 5.The discount rate is 14 percent. a.Calculate the net present value for each project. b.Calculate the IRR for each project. c.What decision should you make regarding these projects?

Compute the discounted payback period for a project with the following cash flows received uniformly within each year and with a required return of 8%: Initial Outlay = $100 Cash Flows: Year 1 = $40 Year 2 = $50 Year 3 = $60

Your company is considering an investment in one of two mutually exclusive projects.Project one involves a labor intensive production process.Initial outlay for Project 1 is $1,495 with expected after tax cash flows of $500 per year in years 1-5.Project two involves a capital intensive process,requiring an initial outlay of $6,704.After tax cash flows for Project 2 are expected to be $2,000 per year for years 1-5.Your firm's discount rate is 10%.If your company is not subject to capital rationing,which project(s)should you take on?

Northwest Industries 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 Compute the net present value of this project if the company's discount rate is 14%.

A one-sign-reversal project should be accepted if it