ch.9

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

5.47

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 profitability index for Project A with a cost of capital of 8%? YearProject AProject B0($42,000.00)($45,000.00)1$14,000.00$28,000.002$14,000.00$12,000.003$14,000.00$10,000.004$14,000.00$10,000.005$14,000.00$10,000.00

1.33

You are considering the following three mutually exclusive projects. The required rate of return for all three projects is 14%. Year A B C 0 $ (1,000) $(5,000) $(50,000) 1 $ 300 $ 1,700 $ 0 2 $300 $ 1,700 $15,000 3 $ 600 $1,700 $ 28,500 4 $300 $1,700 $ 33,000 What is the IRR of the best project? % terms to 2 decimal places w/o % sign

14.23

prob mast Q 7-11

7. The disadvantages of the IRR period method is that it- Requires a lot of data (estimates of all CFs) Only works for normal cash flows Requires complex calculations 8. The multiple IRR problem occurs when the signs of a project's cash flows change more than once.- t 9. NPV assumes intermediate cash flows are reinvested at the cost of equity, while IRR assumes that they are reinvested at the cost of capital- f 10. What are advantages of payback period?- ??? 11. Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. If the discount rate is 8% then what is the PI? Answer in % format with 2 number after the decimal point- 103.67

Compute the payback period for a project that requires an initial outlay of $297,771 that is expected to generate $40,000 per year for 9 years.

7.44

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 8.88%?

????

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 shareholders wealth

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

true

Capital rationing may be beneficial to a firm if it:

weeds out proposals with weaker or biased NPVs

Prob mast Q 1-6

1. match - The investment decision Invest in assets that earn a return greater than the minimum acceptable hurdle rate The financing decision Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations The dividend decision 2. steps- Step 1 Proposal generation Step 2 Review and analysis Step 3 Decision making Step 4 Implementation Step 5 follow up 3. It should not usually be clear whether we are describing independent or mutually exclusive projects in the following chapters because when we only describe one project then it can be assumed to be independent- f 4. Net present value (NPV) is a sophisticated capital budgeting technique; found by adding a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital.- f 5. Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $271 at the end of the next three years and then $1,351 per year for the three years after that. If the discount rate is 4.92% then what is the NPV- ??? 6. The Internal Rate of Return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0- t