Tophat

A manager should always accept the highest NPV project first.

FALSE

Arizona Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? WACC: 9.00% Year 0 1 2 3Cash flows -$1,000 $450 $450 $450

b - 13.84%

Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Old WACC: 10.00% New WACC: 9.50% Year 0 1 2 3 Cash flows -$1,000 $410 $410 $410

c - $9.04

Under certain conditions, a project may have more than one IRR (multiple IRRs). One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project's life such a strip mine

TRUE

BZ Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3Cash flows -$1,075 $500 $500 $500

a - 2.15 years

HSG Enterprises is purchasing a $10 million machine. It will cost $1,000,000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value (straight-line depreciation). The machine will generate incremental revenues of $7 million per year along with incremental costs of $1 million per year. If HSG's marginal tax rate is 20%, what are the annual incremental earnings (net income) associated with the new machine? (Hint#1: Transportation costs are depreciable along with the purchase price of the machine. Hint#2: Incremental Earnings = (Revenue - Costs - Depreciation)(1-T).

a - 3,040,000

Taco Tote is considering a project that has the following cash flow data. What is the project's IRR? What is the project`s NPV?WACC: 12%Year 0= -$1,050Year 1= $450Year 2= $470Year 3= $490

a - IRR = 16.07%, NPV = $75.24

Which of the following statements is CORRECT?

a - If a project's payback is positive, then the project should be accepted because it must have a negative NPV. b - The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem c - One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period correct answer: C

Which of the following statements is CORRECT?

a - The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects b - The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. c - The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects correct: A