Exam 10: Capital Budgeting Techniques

What is the payback period for Tangshan Mining company's new project if 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?

The capital budgeting process consists of five distinct but interrelated steps: proposal generation, review and analysis, decision making, implementation, and follow-up.

A firm is evaluating three capital projects. The net present values for the projects are as follows: The firm should

Which of the following capital budgeting techniques ignores the time value of money?

Net present value profiles are most useful when selecting among mutually exclusive projects.

What is the NPV for the following project if its cost of capital is 0 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?

A $60,000 outlay for a new machine with a usable life of 15 years is an operating expenditure that would appear as a current asset on the firm's balance sheet.

In the case of annuity cash inflows, the payback period can be found by dividing the initial investment by the annual cash inflow.

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

Which pattern of cash flow stream is the most difficult to use when evaluating projects?

Net present value is considered a sophisticated capital budgeting technique since it gives explicit consideration to the time value of money.

Table 10.5 Galaxy Satellite Co. is attempting to select the best group of independent projects competing for the firm's fixed capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20 percent cost of capital. A summary of key data about the proposed projects follows. -Which projects should the firm implement? (See Table 10.5)

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 Y 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 10 percent?

Capital budgeting techniques are used to evaluate the firm's fixed asset investments which provide the basis for the firm's earning power and value.

Mutually exclusive projects are projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.

The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $300 each year for the next three years is 0.333 years.

The payback period is the amount of time required for the firm to dispose of a replaced asset.

The discount rate (which is also known as the required return, cost of capital, or opportunity cost) is the minimum return that must be earned on a project to leave the firm's market value unchanged.

A capital expenditure is an outlay of funds invested only in fixed assets that is expected to produce benefits over a period of time less than one year.

A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should