Chapter 9 Quizzes+hw

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 $1,159 per year for the three years after that. If the discount rate is 2.37% then what is the NPV?

-1130.78

Disadvantages of the IRR period method is that it

-Requires complex calculations -only works for normal cash flows -Requires a lot of data (estimates of all CF's

Advantages of payback period

-does not require complex calculations -does not require discount rate -measures liquidity, easy to communicate

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 $2000 per year for 6 years?

5.47

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

If you can't find investments that make your minimum accepted rate, return the cash to owners of your business

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

The multiple IRR problem occurs when the signs of a projects cash flows change more than once

True

The multiple IRR problems occurs when the sign of a projects cash flows change more than once

True

Capital rationing may be beneficial to a firm if it

Weeds out proposals with weaker or biased NPV's

Compute the payback period for a project that requires an initial outlay of $138,098 that is expected to generate $40,000 per year for 9 years.

3.45

5 steps to the capital budgeting process

1. Proposal generation 2. Review and analysis 3. Decision making 4. Implementation 5. Follow-up

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

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

103.67

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

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 8.04%?

28,761.9

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.

False (NPV calculator function)

NPV assumes that intermediate cash flows are reinvested at the cost of equity, while IRR assumes that they are reinvested at the cost of capital

False

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

The cost of capital exceeds the IRR

The Internal Rate of Return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0

True

It should not usually be clear whether we are describing independent or mutually exclusive projects in the following chapter because when we only describe one project then it can be assumed to be independent

false (should be clear)

The investment decision

investments in assets that have a return greater than the minimum accepted hurdle rate

The primary purpose of capital budgeting is to

maximize the shareholder's wealth