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Exam 10: Capital-Budgeting Techniques and Practice

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Question 41

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Which of the following statements about the net present value is true?

A) It produces a percentage result that is easy to describe.
B) It has an inadequate reinvestment assumption.
C) It is likely that there will be more than one NPV for a project.
D) It may be used to select among projects of different sizes.

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

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Question 42

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If a project has multiple internal rates of return,the lowest rate should be used for decision making purposes.

A) True
B) False

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Question 43

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Zellars,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.Zellars,Inc.'s required rate of return for these projects is 10%.The net present value for Project B is

An acceptable project should have a net present value greater than or equal to zero and a profitability index greater than or equal to one.

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

Patrick Motors has several investment projects under consideration,all with positive net present values.However,due to a shortage of trained personnel,a limit of $1,250,000 has been placed on the capital budget for this year.Which of the projects listed below should be included in this year's capital budget? Explain your answer.

The profitability index is the ratio of the company's net income (or profits)to the initial outlay or cost of a capital budgeting project.

The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years.The after-tax cash flows for projects S and L are listed below. Calculate the equivalent annual annuity for each project assuming a required return of 15%.What decision should be made?

Given the following annual net cash flows,determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $750,000.

Two projects are mutually exclusive if the accept/reject decision for one project has no impact on the accept/reject decision for the other project.

Which of the following statements is most correct?

Consider a project with the following information: Initial outlay = $1,500 Compute the profitability index if the company's discount rate is 10%.

The internal rate of return is

Your firm is considering an investment that will cost $920,000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's internal rate of return?

The payback period ignores the time value of money and therefore should not be used as a screening device for the selection of capital budgeting projects.

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

Rent-to-Own Equipment 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.Rent-to-Own's required rate of return is 8%.What is the payback period of this project?

You are considering investing in a project with the following year-end after-tax cash flows: Year 1: $57,000 Year 2: $72,000 Year 3: $78,000 If the initial outlay for the project is $185,000,compute the project's internal rate of return.

The net present value always provides the correct decision provided that

Zellars,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.Zellars,Inc.'s required rate of return for these projects is 10%.The modified internal rate of return for Project B is