Chapter 9

Idaho Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $450,000. The respective future cash inflows from its five-year project for years 1 through 5 are $95,000 each year. Idaho expects an additional cash flow of $60,000 in the fifth year. The firm uses the IRR method and has a hurdle rate of 10%. Will Idaho accept the project?

) Idaho rejects the project because it has an IRR less than 10%.

Consider the following three-year project. The initial after-tax outlay or after-tax cost is $1,500,000. The future after-tax cash inflows for years 1, 2, 3 and 4 are: $800,000, $800,000, $300,000 and $100,000, respectively. What is the payback period without discounting cash flows?

1.875 years

Nodak, Inc. is currently considering an eight-year project that has an initial outlay or cost of $160,000. The cash inflows from its project for years 1 through 5 are the same at $55,000. Nodak has a discount rate of 11%. Because there is a shortage of funds to finance all good projects, Nodak wants to compute the profitability index (PI) for each project. That way Nodak can get an idea as to which project might be a better choice. What is the PI for Nodak's current project?

About 1.27

Axios, Inc. is considering Project A and Project B, which are two mutually exclusive projects with unequal lives. Project A is an eight-year project that has an initial outlay or cost of $180,000. Its future cash inflows for years 1 through 8 are $38,000. Project B is a six-year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 6 are the same at $36,000. Axios uses the equivalent annual annuity (EAA) method and has a discount rate of 11.50%. Will

Axios accepts Project A because its NPV (and thus EAA) is positive and Project B's NPV (and thus EAA) is negative.

Idaho Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $75,000 each year. Idaho expects an additional cash flow of $50,000 in the fifth year. The firm uses the net present value method and has a discount rate of 10%. Will Idaho accept the project?

Idaho rejects the project because it has an NPV less than $0.

Sandstone, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future cash inflows from its project are $40,000, $40,000, $30,000 and $30,000 for years 1, 2, 3 and 4, respectively. Sandstone uses the net present value method and has a discount rate of 12%. Will Sandstone accept the project?

Sandstone accepts the project because it has a positive NPV of over $28,000.

Darrox, Inc. is considering a four-year project that has an initial outlay or cost of $90,000. The future cash inflows from its project are $50,000, $30,000, $30,000, and $30,000 for years 1, 2, 3 and 4, respectively. Darrox uses the internal rate of return method to evaluate projects. What is the approximate IRR for this project?

The IRR is about 22.80%.

The initial outlay or cost for a four-year project is $1,100,000. The respective cash inflows for years 1, 2, 3 and 4 are: $500,000, $300,000, $300,000 and $300,000. What is the discounted payback period if the discount rate is 10%?

about 3.84 years

The capital budgeting decision model that utilizes all the discounted cash flow of a project is the ________ model, which is one of the single most important models in finance.

net present value

The ________ model is usually considered the best of the capital budgeting decision-making models.

net present value (NPV)

The ________ method is simple and fast but economically unsound as it ignores all cash flow after the cutoff date and ignores the time-value of money.

payback period

The net present value of an investment is ________.

the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project

The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals ________.

the present value of the future benefits or cash inflows

According to an academic survey of large and small U.S. businesses, the IRR method of capital budgeting is slightly preferred over NPV by the survey respondents.

true

he discounted payback method, net present value method (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI) are all consistent with the time value of money.

true