Question

What type of Capital budgeting Financial decisions may call for the use of Net Present value only and how may that increase the Net Present Value of that project.

Answer #1

Situations where the Capital budgeting financial decisions may call for the use of Net Present Value only are:

1. When the investment decisions relate to purchase of physical assets or replacing a existing an asset, determining the NPV is essential to estimate the worth of the asset and the cash flows it will generate.

2. To choose between two mutually exclusive projects. NPV is essential in making the choice, the project with the highest NPV is chosen.

NPV of the project can be increased by decreasing the discount rate, estimating the cash flows for a lesser period of time.

In taking capital budgeting decisions, financial
managers are advised to use more than one capital budgeting
technique for consistency, reliability and accuracy in capital
budget decisions. Although the Net Present Value (NPV) capital
budgeting technique is required in most capital budgeting
discussion processes, it may sometimes have conflicting decision
with Internal Rate of Return (IRR) under certain conditions.
Briefly state the conditions under which NPV and IRR results in
conflicting decisions and how the financial manager can resolve
this conflict?

When applying the concept of present value to capital budgeting
decisions, which of the following statements is TRUE?
Question 28 options:
Internal rate of return cannot be computed when cash flows are
unequal year to year
A project with a higher IRR will be preferable over one with a
lower IRR.
A positive NPV means that a project earns less than the cost of
capital on a project.
Residual value is not included in the calculation of Net Present
Value.

Net present value is only a financial and economic criterion for
selecting a project. What other factors may be important in
accepting the project?

Net present value is only a financial and economic criterion for
selecting a project. What other factors may be important in
accepting the project?

1) Capital budgeting is the process of analyzing potential
projects. What does net present value (NPV) represent in capital
budgeting analysis? How does NPV compare to internal rate of return
(IRR); specifically, what makes them similar and different? What
functional flaw exists in the discounted payback period calculation
that makes this capital budgeting tool suspect?

Find an article where one of the methods of capital budgeting
(net present value, payback period, profitability index, etc ) is
used by a company for a project and describe the result of the
project. Based on the method used, did the company move forward
with the project or dissolve the project?

Given the following data, calculate the net present value for
this capital budgeting project: Annual operating cash flow =
$198,500 Fixed asset investment = $649,000 Working capital
investment = $38,000 Project life=4 years; Depreciation method=SLD
to zero Market salvage value=$187,000; Cost of capital=14%; Tax
rate=35%

Which of the following best explains why the net present value
method of capital budgeting is preferred over the internal
rate−of−return method?
.
the net present value method is expressed as a percentage of
initial investment
B.
the calculation under the net present value method is easy as it
does not use time value of money
C.
the percentage return computed under the net present value
method is very easy to compare
D.
the net present values of individual projects...

How can a company use bonds in its capital budgeting
decisions?

Miller Company, which considers taxes in its capital budgeting
decisions is considering the purchase of a machine with the
following characteristics:
Initial cost
(not including working capital)
$220,000
Immediate working capital requirement
(released at the end of the project)
$20,000
Expected life of the project
4 years
Annual net operating cash inflows
$75,000
Residual value (at end of useful life)
$0
Annual straight-line depreciation expense
$55,000
Required rate of return (discount rate)
10%
Income tax rate
20%
Compute the after-tax...

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