The capital budgeting manager for XYZ Corporation, a very profitable high technology
company, completed her analysis of Project A assuming 5-year depreciation. Her accountant
reviews the analysis and changes the depreciation method to 3-year depreciation. This change
will
increase the present value of the NCFs.
decrease the present value of the NCFs.
have no effect on the NCFs because depreciation is a non-cash
expense
only change the NCFs if the useful life of the depreciable asset is
greater than 5 years.
Project Alpha has an internal rate of return (IRR) of 15 percent. Project Beta has an IRR of 14
percent. Both projects have a required return of 12 percent. Which of the following statements
is MOST correct?
Both projects have a positive net present value (NPV).
Project Alpha must have a higher NPV than Project Beta.
If the required return were less than 12 percent, Project Beta would
have a higher IRR than Project Alpha.
Project Beta has a higher profitability index than Project Alpha.
Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs
$95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B
costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000
in year three, and $45,000 in year four. The firm's required rate of return for these projects is
10%. The net present value for Project A is
$12,35
8.
$16,94
7.
$19,45
8.
$26,07
4.
Arguments against using the net present value and internal rate of return methods
include that
they fail to use accounting profits.
they require detailed long-term forecasts of the incremental
benefits and costs.
they fail to consider how the investment project is to be
financed.
they fail to use the cash flow of the project.
Raindrip Corp. can purchase a new machine for $1,875,000 that will provide
an annual net cash flow of $650,000 per year for five years. The machine will
be sold for $120,000 after taxes at the end of year five. What is the net present
, value of the machine if the required rate of return is 13.5%.
$558,3
78
$513,8
59
$473,4
98
$447,2
92
A machine that costs $1,500,000 has a 3-year life. It will generate
after tax annual cash flows of $700,000 at the end of each year. It
will be salvaged for $200,000 at the end of year 3. If your required
rate of return for the project is 13%, what is the NPV of this
investment?
$291,4
17
$400,0
00
$600,0
00
$338,3
95
All of the following are criticisms of the payback period criterion
EXCEPT
time value of money is not accounted for.
cash flows occurring after the payback are
ignored.
it deals with accounting profits as opposed to cash
flows.
none of the above; they are all criticisms of the
payback period criteria.
Different discounted cash flow evaluation methods may provide conflicting rankings of
investment projects when
the size of investment outlays differ.
the projects are mutually exclusive.
the accounting policies differ.
the internal rate of return equals the cost
of capital.
A significant disadvantage of the internal rate of return is that it
does not fully consider the time value of
money.
company, completed her analysis of Project A assuming 5-year depreciation. Her accountant
reviews the analysis and changes the depreciation method to 3-year depreciation. This change
will
increase the present value of the NCFs.
decrease the present value of the NCFs.
have no effect on the NCFs because depreciation is a non-cash
expense
only change the NCFs if the useful life of the depreciable asset is
greater than 5 years.
Project Alpha has an internal rate of return (IRR) of 15 percent. Project Beta has an IRR of 14
percent. Both projects have a required return of 12 percent. Which of the following statements
is MOST correct?
Both projects have a positive net present value (NPV).
Project Alpha must have a higher NPV than Project Beta.
If the required return were less than 12 percent, Project Beta would
have a higher IRR than Project Alpha.
Project Beta has a higher profitability index than Project Alpha.
Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs
$95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B
costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000
in year three, and $45,000 in year four. The firm's required rate of return for these projects is
10%. The net present value for Project A is
$12,35
8.
$16,94
7.
$19,45
8.
$26,07
4.
Arguments against using the net present value and internal rate of return methods
include that
they fail to use accounting profits.
they require detailed long-term forecasts of the incremental
benefits and costs.
they fail to consider how the investment project is to be
financed.
they fail to use the cash flow of the project.
Raindrip Corp. can purchase a new machine for $1,875,000 that will provide
an annual net cash flow of $650,000 per year for five years. The machine will
be sold for $120,000 after taxes at the end of year five. What is the net present
, value of the machine if the required rate of return is 13.5%.
$558,3
78
$513,8
59
$473,4
98
$447,2
92
A machine that costs $1,500,000 has a 3-year life. It will generate
after tax annual cash flows of $700,000 at the end of each year. It
will be salvaged for $200,000 at the end of year 3. If your required
rate of return for the project is 13%, what is the NPV of this
investment?
$291,4
17
$400,0
00
$600,0
00
$338,3
95
All of the following are criticisms of the payback period criterion
EXCEPT
time value of money is not accounted for.
cash flows occurring after the payback are
ignored.
it deals with accounting profits as opposed to cash
flows.
none of the above; they are all criticisms of the
payback period criteria.
Different discounted cash flow evaluation methods may provide conflicting rankings of
investment projects when
the size of investment outlays differ.
the projects are mutually exclusive.
the accounting policies differ.
the internal rate of return equals the cost
of capital.
A significant disadvantage of the internal rate of return is that it
does not fully consider the time value of
money.
