Quiz Capital Budgeting
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
B&H, Inc. is currently considering an five-year project that has an initial outlay or cost of $220,000. The future cash inflows from its project for years 1 through 5 are the same at $50,000. B&H has a discount rate of 8%. Because of capital rationing (shortage of funds for financing), B&H wants to compute the profitability index (PI) for each project. What is the PI for B&H's current project?
About 0.91
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? Use Spreadsheet!
About 1.27
Find the Modified Internal Rate of Return (MIRR) for the following series of future cash flows, given a discount rate of 9%: Year 0: -$18,000; Year 1: $4,000; Year 2: $5,500; Year 3: $3,000; Year 4: $9,500; and, Year 5: $2,000. Use Spreadsheet!
About 9.77%
________ is at the heart of corporate finance, because it is concerned with making the best choices about project selection.
Capital budgeting
Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting? - Multiple IRRs - Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not - Incorporates the IRR as the reinvestment rate for the future cash flows - Comparing mutually exclusive projects
Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not
The ________ model provides a single measure (return) but must apply risk outside the model, thus allowing for errors in rankings of projects.
IRR
In regard to the NPV method, which of the statements below is TRUE? -In the NPV model, if two projects are being compared, the one with the highest IRR is selected. -In the NPV model, the present cash flows are discounted at the rate r, the cost of capital. -In the NPV model, most future cash flows are stated in present value or current dollars and the inflow is "netted" against the outflow to see if the net amount is positive or negative. -In the NPV model, the net present value of an investment is the present value of all benefits (cash inflow) minus the present value of all costs (cash outflow) of the project.
In the NPV model, the net present value of an investment is the present value of all benefits (cash inflow) minus the present value of all costs (cash outflow) of the project.
Which of the statements below is TRUE of the payback period method?
It ignores the cash flow after the initial outflow has been recovered.
The ________ method is economically sound and properly ranks projects across various sizes, time horizons, and levels of risk, without exception for all independent projects.
NPV
The ________ model is usually considered the best of the capital budgeting decision-making models.
Net Present Value
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 (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 ________ model answers one basic question: How soon will I recover my initial investment?
Payback period
Which method is designed to give the dollar amount of return for every $1.00 invested in the project in terms of current dollars?
Profitability Index Method
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.
Sportswear Online, Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000 and $80,000. Sportswear Online uses the net present value method and has a discount rate of 11%. Will Sportswear Online accept the project?
Sportswear Online rejects the project because the NPV is about -$22,375.73.
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? Use Spreadsheet!
The IRR is about 22.80%.
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
Capital budgeting decisions are typically long-term decisions.
True
Project A has an NPV of $20,000 and a PI of 1.2. Project B has an NPV of $10,000 and a PI of 1.3. Both projects have equal lives. Which project should be preferred if we are NOT concerned with capital rationing (that is, we are NOT concerned with being short of funds)?
We should prefer Project A since it has a higher NPV. !!!!!!!!!!!!!