Exam 10: Capital Budgeting Techniques

________ is a series of equal annual cash flows.

In spite of the theoretical superiority of NPV, financial managers prefer to use IRR.

The ________ is the discount rate that equates the present value of the cash inflows with the initial investment.

The payback period of a project that costs $1,000 initially and promises after-tax cash inflows of $3,000 each year for the next three years is 0.333 years.

A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is ________.

Table 10.4 A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent. -Using the net present value approach to ranking projects, which projects should the firm accept? (See Table 10.4)

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of $10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is

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

Table 10.1 -Given the information in Table 10.1 and 15 percent cost of capital, (a) compute the net present value. (b) should the project be accepted?

If the NPV is greater than $0.00, a project should be accepted.

The accept-reject approach involves the ranking of capital expenditure projects on the basis of some predetermined measure such as the rate of return.

A project's net present value profile is a graph that plots a project's IRR for various discount rates.

A nonconventional cash flow pattern is one in which an initial outflow is followed by a series of both inflows and outflows.

On a purely theoretical basis, NPV is a better approach when selecting among two mutually exclusive projects.

A sophisticated capital budgeting technique that can be computed by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital is called internal rate of return.

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a projects inflows with the present value of its outflows is called net present value.

Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of one does not eliminate any others from further consideration.

A sophisticated capital budgeting technique that can be computed by solving for the discount rate that equates the present value of a projects inflows with the present value of its outflows is called internal rate of return.

A capital expenditure is all of the following EXCEPT

A project's net present value profile is a graph that plots a project's NPV for various discount rates.