FIN 3310: Chapter 9

Tangerine Inc. is evaluating a capital project for investment. The initial cash outflow in Year 0 is $1,500 followed by cash inflow of $500 each year for four years. Which of the following is the terminal value of the project? Assume the required rate of return is 12 percent.

Tangerine Inc. is evaluating a capital project for investment. The initial cash outflow in Year 0 is $1,500 followed by cash inflow of $500 each year for four years. Which of the following is the terminal value of the project? Assume the required rate of return is 12 percent.

$2,389.66

Suppose a firm has evaluated four capital budgeting projects and, using one of the time value of money capital budgeting techniques, has determined that all of the projects are acceptable. If the projects are mutually exclusive, which of the following capital budgeting techniques should be used to make the purchasing decision to ensure the firm's value is maximized?

net present value (NPV)

Which of the following statements is correct?

To compute the NPV for a project, the firm's required rate of return must be known. To compute a project's internal rate of return (IRR), the firm's required rate of return is not used because the IRR is the discount rate where the project's NPV equals zero.

If a project's net present value (NPV) is positive, _____.

it is an acceptable investment

The net present value (NPV) of a project is negative when the discount rate used is _____.

greater than the project's internal rate of return (IRR)

Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 0 and inflows of $300 at the end of Years 1-5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)?

12.87%

Which of the following statements about the internal rate of return (IRR) capital budgeting technique is correct?

It is the discount rate that equates the present value of a project's expected future cash flows to the initial amount invested.

Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial investment for each project is $50,000. Project A will generate cash inflows equal to $15,625 at the end of each of the next five years; Project B will generate only one cash inflow in the amount of $99,500 at the end of the fifth year (i.e., no cash flows are generated in the first four years). The required rate of return of Ace Inc. is 10 percent. Which project should Ace Inc. purchase?

Project B should be purchased because it has a higher net present value (NPV) than Project A.

Which of the following is a correct statement about the discounted payback period (DPB) technique that is used to evaluate capital budgeting projects?

The DPB method considers the time value of money.

Suppose a firm evaluates four independent investments using only capital budgeting techniques that consider the time value of money. Which of the following statements is correct?

All of the capital budgeting techniques the company uses should provide the same accept/reject decisions.

The traditional payback period technique that is used in capital budgeting analyses _____.

is the simplest and oldest formal method used to evaluate capital budgeting projects

Smart Solutions Inc. is evaluating a capital project for expansion. The project costs $10,000, and it is expected to generate $5,000 per year for three years. If the firm's required rate of return is 10 percent, what is the project's terminal value?

$16,550

Which of the following statements is correct?

The net present value (NPV) technique provides an indication of the dollar benefit (on a present value basis) to the firm's shareholders of purchasing a capital budgeting project.

A project's net present value is equal to the _____.

present value of the expected future cash inflows minus the present value of all the cash outflows

Which of the following capital budgeting evaluation techniques is based on the concept that it is better to recover the cost of (investment in) a project sooner rather than later?

Traditional payback period (PB)

Project A, which costs $1,000 to purchase, will generate net cash inflows equal to $500 at the end of each of the next three years. The project's required rate of return is 10 percent. What are the project's internal rate of return (IRR) and modified internal rate of return (MIRR)?

23.4%; 18.3%

Everything else equal, a project that has a long traditional payback period (PB) _____.

has greater implied risk than a project that has a shorter PB

Which of the following cash flow patterns would produce multiple internal rates of return (IRRs) for a project?

A project requires a large cash payment today, it generates cash inflows for the next four years, a large cash payment must be paid in Year 5, and then cash inflows are generated for the remainder of the project's life.

If a project's net present value (NPV) is positive, _____.

its initial investment is recovered on a present value basis prior to the end of the project's useful life

An investment firm is selling a new product that will pay $100 at the end of each of the next 20 years. If the new investment costs $1,246 to purchase, what is its internal rate of return (IRR)?

5%

Union Atlantic Corporation, which has a required rate of return equal to 14 percent, is evaluating a capital budgeting project that requires an initial investment of $170,000. The project will generate a $60,750 cash inflow at the year-end of each of the next four years. According to this information, which of the following statements is correct?

The project is acceptable because its net present value is positive.

When determining a project's true profitability, it is normally better to compute the project's modified internal rate of return (MIRR) rather than its internal rate of return (IRR) because the MIRR technique _____.

assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas IRR assumes the cash flows are reinvested at the project's IRR

If the net present value (NPV) of a project is positive, _____.

accepting the project will increase the value of the firm

The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years, and produces after-tax cash flows equal to $44,503 per year. If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's internal rate of return (IRR)?

18%

Modified internal rate of return (MIRR) is the discount rate that forces the present value of a project's terminal value to equal the _____.

present value of its cash outflows