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Exam 10: Capital-Budgeting Techniques and Practice

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Question 41

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Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The profitability index for Project A is

A) 1.27.
B) 1.22.
C) 1.17.
D) 1.12.

E) None of the above
F) All of the above

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Question 42

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What is the internal rate of return's assumption about how cash flows are reinvested?

A) They are reinvested at the firm's discount rate.
B) They are reinvested at the required rate of return.
C) They are reinvested at the project's internal rate of return.
D) They are only reinvested at the end of the project.

E) A) and C)
F) B) and D)

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Question 43

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Because the NPV and PI methods both yield the same accept/reject decision,a company attempting to rank capital budgeting projects for funding consideration can use either method and get the same results.

Lithium,Inc.is considering two mutually exclusive projects,A and B.Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two.Project B costs $120,000 and is expected to generate $64,000 in year one,$67,000 in year two,$56,000 in year three,and $45,000 in year four.Lithium,Inc.'s required rate of return for these projects is 10%.The internal rate of return for Project B is

A project that requires an initial investment of $340,000 is expected to have an after-tax cash flow of $70,000 per year for the first two years,$90,000 per year for the next two years,and $150,000 for the fifth year? Assume the required return for this project is 10%. a.What is the NPV of the project%? b.What is the IRR of the project? c.What is the MIRR of the project? d.What is the PI of the project? e.What decision would you make regarding this project if the required rate of return is 10%? f.What is the equivalent annual annuity using a 10% required rate of return?

DYI Construction Co.is considering a new inventory system that will cost $750,000.The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one,$325,000 in year two,$150,000 in year three,and $180,000 in year four.DYI's required rate of return is 8%.What is the payback period of this project?

Interstate Appliance Inc.is considering the following 3 mutually exclusive projects.Projected cash flows for these ventures are as follows: If Interstate Appliance has a 12% cost of capital,what decision should be made regarding the projects above?

The internal rate of return is the discount rate that equates the present value of the project's future free cash flows with the project's initial outlay.

The Internal Rate of Return (to nearest whole percent) is

Advantages of the payback period include that it is easy to calculate,easy to understand,and that it is based on cash flows rather than on accounting profits.

Which of the following statements about the internal rate of return (IRR) is true?

The Net Present Value (or NPV) criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________,and the Internal Rate of Return (or IRR) criteria assumes that expected future cash flows are reinvested at ________.

NPV is the most theoretically correct capital budgeting decision tool examined in the text.

A project would be acceptable if

A project requires an initial investment of $389,600.The project generates free cash flow of $540,000 at the end of year 4.What is the internal rate of return for the project?

If the net present value of a project is zero,then the profitability index will equal one.

For a project with multiple sign reversals in its cash flows,the net present value can be the same for two entirely different discount rates.

An independent project should be accepted if it

Arguments against using the net present value and internal rate of return methods include that

A significant disadvantage of the internal rate of return is that it