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Exam 9: Capital Budgeting Techniques

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Question 41

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Going Postal Service Inc. is considering an upgrade of its sorting machines. The cost of the project is $10,000 per machine and the improvement is expected to save $5,000 each year, beginning one year after the adoption of the project and continuing for a total of 5 years. If Going's cost of capital is 10%, is the project acceptable? Round answer to the nearest whole dollar.

A) Yes, the NPV = $15,000
B) Yes, the NPV = 15%
C) No, the NPV = -$8,954
D) Yes, the NPV = +$8,954
E) No, the NPV = 8%

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Question 42

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A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is:

A) -$1,000
B) $0
C) $1,000
D) $1.25

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Question 43

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Two projects being considered are mutually exclusive and have the following projected cash flows: $\begin{array} { | c | c | c | } \hline \text { Year } & \text { Project A } & \text { Project B } \\\hline 0 & - \$ 50,000 & - \$ 50,000 \\\hline 1 & \$ 15,625 & 0 \\\hline 2 & \$ 15,625 & 0 \\\hline 3 & \$ 15,625 & 0 \\\hline 4 & \$ 15,625 & 0 \\\hline 5 & \$ 15,625 & \$ 99,500 \\\hline\end{array}$ If the required rate of return on these projects is 10%, which would be chosen and why?

For mutually exclusive projects the underlying cause of conflicts in ranking for projects by internal rate of return and net present value methods is:

If only one capital budgeting technique could be used to evaluate a project, which of the following would be the most preferred?

When the net present value is negative, the internal rate of return is ________ the cost of capital.

A project requires a current expenditure of $300 and expects to generate $100 cash inflows at the end of each of the next 5 years. What conclusion can be drawn from examining an NPV profile for this project?

An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay a premium of $100 per year at the end of each year of the 20 years. Find the internal rate of return to the nearest whole percentage point.

A project costs $1,000 today and is expected to produce cash inflows of $800 at the end of each of the next two years. If the firm's cost of capital is 10%, what is the modified internal rate of return? Round answer to the nearest whole percent.

The Seattle Corporation has been presented with an investment opportunity which will yield end of year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. What is the NPV for this investment?

Alyeska salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a new automated production line project it is considering. The project has a cost of $275,000 and is expected to provide after-tax annual cash flows of $73,306 for eight years. The firm's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the firm of 12 percent. What is the project's MIRR?

In comparing the internal rate of return and net present value methods of evaluation,

An NPV profile is most helpful in dealing with what type of problem?

The project cash flows and NPVs for Projects A and B are provided in the table below. Which project has a higher profitability index? $\begin{array} { | c | c | c | } \hline & \text { Project A } & \text { Project B } \\\hline \text { Year 0 } & - \$ 1,900 & - \$ 2,000 \\\hline \text { Year 1 } & \$ 2,500 & \$ 1,550 \\\hline \text { Year 2 } & \$ 1,500 & \$ 1,900 \\\hline \text { NPV } & \$ 1,408.12 & \$ 784.50 \\\hline\end{array}$

The least desirable capital budgeting technique from a theoretical standpoint is:

Unsophisticated capital budgeting techniques do not:

An NPV profile:

________ is the process of deciding which long-term investments or projects a firm will acquire using the long-term funds a firm has available.

Which of the following capital budgeting methods might not consider the salvage value of a machine being considered for purchase?

Which of the following statements is incorrect?