Exam 10: Capital Budgeting Techniques

Table 10.3 A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows: -If the firm in Table 10.3 has a required payback of two (2) years, it should

One weakness of payback is its failure to recognize cash flows that occur after the payback period.

In general, the greater the difference between the magnitude and/or timing of cash inflows, the greater the likelihood of conflicting ranking between NPV and IRR.

All of the following are steps in the capital budgeting process EXCEPT

Fixed assets that provide the basis for the firm's profit and value are often called

The first step in the capital budgeting process is

Capital expenditure proposals are reviewed to assess their appropriateness in light of the firm's overall objectives and plans, and to evaluate their economic validity.

An outlay for advertising and management consulting is considered to be a fixed asset expenditure.

Table 10.1 -The cash flow pattern depicted is associated with a capital investment and may be characterized as ________. (See Table 10.1)

The NPV of an project with an initial investment of $1,000 that provides after-tax operating cash flows of $300 per year for four years where the firm's cost of capital is 15 percent is -$143.51.

In capital budgeting, the preferred approaches in assessing whether a project is acceptable are those that integrate time value procedures, risk and return considerations, and valuation concepts.

Conflicting rankings in the case of mutually exclusive projects using NPV and IRR often results from differences in the magnitude and/or timing of cash flows.

Independent projects are projects that compete with one another for the firm's resources, so that the acceptance of one eliminates the others from further consideration.

Research and development is considered to be a motive for making capital expenditures.

When the net present value is negative, the internal rate of return is ________ the cost of capital.

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

Unlike the net present value criteria, the internal rate of return approach assumes an interest rate equal to

In general, projects with similar-sized investments and lower early-year cash inflows (lower cash inflows in the early years) tend to be preferred at higher discount rates.

All of the following are weaknesses of the payback period EXCEPT

Tangshan Mining Company is considering investing in a new mining project. The firm's cost of capital is 12 percent and the project is expected to have an initial after tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3 and ($1,300,000) in year 4? (a) Calculate the project's NPV. (b) Calculate the project's IRR. (c) Should the firm make the investment?