Module 5, topic 1 - NPV, IRR, capital budgeting and rationing

Compute the payback period for a project that requires an initial outlay of $153,425 that is expected to generate $40,000 per year for 9 years.

153,425/40,000 = 3.84

Projects that compete with one another so that the acceptance of one eliminates from further consideration all other projects that serve a similar function.

Mutually Exclusive

The "gold standard" of investment criteria refers to:

NPV

What is the NPV of a project that costs $100,000.00 and returns $50,000.00 annually for three years if the opportunity cost of capital is 9.98%?

CFo = -100,000 CO1 = 50,000 FO1 = 3 I = 9.98 CPT NPV = 24,383.39

What is the internal rate of return for a project with an initial outlay of $10,000 that is expected to generate cash flows of $2,000 per year for 6 years?

FV = 0 PV = -10000 PMT = 2000 N = 6 CPT I = 5.47%

The multiple IRR problem occurs when the signs of a project's cash flows change more than once.

True

Which of the following statements is correct for a project with a negative NPV?

The cost of capital exceeds the IRR

The primary purpose of capital budgeting is to:

maximize the shareholders' wealth.

Capital rationing may be beneficial to a firm if it:

weeds out proposals with weaker or biased NPVs.