Exam 10: Capital Budgeting Techniques

What is the NPV for the following project if its cost of capital is 12 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows 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 firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. The payback period of the project is

What is the IRR for the following 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, $1,700,000 in year 3 and $1,300,000 in year 4?

The net present value is found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return.

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

Many firms use the payback method as a guideline in capital investment decisions. Reasons they do so include all of the following EXCEPT

Since the payback period can be viewed as a measure of risk exposure, many firms use it as a supplement to sophisticated decision techniques.