Question

- You are evaluating a capital budgeting project that costs $25,000 and is expected to generate cash flows equal to $10,000 per year for four years. The required rate of return is 10 percent. Compute the project’s (a) net present value, (b) profitability index, and (c) internal rate of return. (d) Should the project be purchased?

Answer #1

Jackson's Autos (JA) is evaluating a capital budgeting project
that costs $565,000. The project will generate $100,000 per year
for the next 10 years. JA's required rate of return is 11 percent.
What is the project's internal rate of return (IRR)?
a. 5.9%
b. 17.7%
c. 11.0%
d. none of the above

The capital budgeting director of Sparrow Corporation is
evaluating a project which costs $250,000, is expected to last for
10 years and produce after-tax cash flows, including depreciation,
of $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 IRR
(answer in percent)?
8%
12%
14%
5%
18%

Capital Budgeting Analysis :
A firm is planning a new project that is projected to yield cash
flows of - $595,000 in Year 1, $586,000 per year in Years 2 through
5, and $578,000 in Years 6 through 11. This investment will cost
the company $2,580,000 today (initial outlay). We assume that the
firm's cost of capital is 11%.
(1) Draw a timeline to show the cash
flows of the project.
(2) Compute the project’s payback
period, net present value...

Three Waters Co. is evaluating a proposed capital budgeting
project that will require an initial investment of $1,350,000. The
project is expected to generate the following net cash flows:
Year Net Cash Flow
1 $300,000
2 $425,000
3 $400,000
4 $425,000
Three Waters Co. has been basing capital budgeting decisions on
a project’s NPV; however, its new CFO wants to start using the
internal rate of return (IRR) method for capital budgeting
decisions. The CFO says that the IRR is...

Project P costs $15,000 and is expected to produce benefits
(cash flows) of $4,500 per year for five years. Project Q costs
$37,500 and is expected to produce cash flows of $11,100 per year
for five years. Calculate each project’s (a) net present value
(NPV), (b) internal rate of return (IRR), and (c) mod- ified
internal rate of return (MIRR). The firm’s required rate of return
is 14 percent. Compute the (a) NPV, (b) IRR, (c) MIRR,
and (d) discounted payback...

. (NPV,IRR)A company can invest $1,600,000 in a capital
budgeting project that will generate the following forecasted cash
flows:
Year Cash flow
1 $500,000
2 720,000
3 300,000
4 600,000
The company has a 13% cost of capital.
a. Calculate the project’s net present value.
b. Calculate the project’s internal rate of return.
c. Should the firm accept or reject the project?
d. What is the value added to the firm if it accepts this
proposed investment?

You are a financial analyst for the Brittle Company. The
director of capital budgeting has asked you to analyze two proposed
capital investments: Projects X and Y. Each project has a cost of
$10,000, and the cost of capital for each is 12%. The projects'
expected net cash flows are shown in the table below.
Expected Net Cash Flows
Year
Project X
Project Y
0
– $10,000
– $10,000
1
6,500
3,500
2
3,000
3,500
3
3,000
3,500
4
1,000...

You are evaluating a capital budgeting replacement project with
a net investment of $85,000, which includes both an after-tax
salvage from the old asset of $5,000 and an additional working
capital investment of $10,000. The expected annual incremental cash
flows after-tax is $14,000. The project has a life of 9 years with
an expected terminal value at the end of the project of $13,000.
The cost of capital of the firm is 10 percent and the firm’s
marginal tax rate...

A firm is evaluating the acceptability of an investment that
costs $90,000 and is expected to generate annual cash flows equal
to $20,000 for the next six years. If the firm’s required rate of
return is 10 percent, what is the NPV of the project? Should the
project be purchased?

You are a financial analyst for Hittle Company. The director of
capital budgeting has asked you to analyze two proposed capital
investments, Projects X and Y. Each project has a cost of $10,000,
and the cost of capital for each project is 10 percent. The payback
cutoff period is 3 years. The projects’ expected net cash flows are
as follows:
Expected Net Cash Flows
Year
Project X
0 ($10,000)
1 6,500
2 3,000
3 3,000
4 1,000
Project Y
($10,000)...

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