Exam 10: Capital Budgeting Techniques

The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 for the next three years is 3.33 years.

Table 10.2 -The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.2)

The basic motives for capital expenditures are to expand, replace, or renew fixed assets or to obtain some other, less tangible benefit over a long period.

If a project's payback period is greater than the maximum acceptable payback period, we would accept it.

In comparing the internal rate of return and net present value methods of evaluation,

Table 10.3 A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows: -The new financial analyst does not like the payback approach (Table 10.3) and determines that the firm's required rate of return is 15 percent. His recommendation would be to

A project must be rejected if its payback period is less than the maximum acceptable payback period.

Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?

A $60,000 outlay for a new machine with a usable life of 15 years is called

What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?

Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are called

Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because

The ________ is the compound annual rate of return that the firm will earn if it invests in the project and receives the given cash inflows.

The payback period is generally viewed as an unsophisticated capital budgeting technique, because it does not explicitly consider the time value of money by discounting cash flows to find present value.

Unsophisticated capital budgeting techniques do not

If the NPV is greater than the initial investment, a project should be accepted.

If a firm is subject to capital rationing, it is able to accept all independent projects that provide an acceptable return.

________ projects have the same function; the acceptance of one ________ the others from consideration.

A conventional cash flow pattern is one in which an initial outflow is followed only by a series of inflows.

Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?