Question

(a) Explain why investment appraisal methods based on project cash flows are regarded as superior to earnings-based measures such as forecasted return on assets. (120 words) (b) Compare the merits of the net present value (NPV), internal rate of return (IRR) and discounted payback period methods of capital investment project appraisal, assuming the firm’s objective is to maximise the wealth of its equityholders. What conditions must apply for the net present value (NPV) and internal rate of return (IRR) methods to always give the same signal to accept or reject a capital investment project? (210 words) (c) A firm may be unable to undertake all of its wealth-creating projects due to insufficient available funds for investment. What market imperfections might cause this problem? How should the firm identify its optimal capital investment strategy if it faces this problem? (150 words) (8 ma

Answer #1

Which of the following statements about capital budgeting
decision methods is most correct?
NPV is superior since it is the most conceptually correct
method.
IRR is superior since it measures the rate of return on a
capital investment.
PI is superior since it measures the present value benefit per
dollar of capital invested.
PB is superior since it is quick and easy to use and
understand.
None of the three methods is considered superior to the
others.

Choose a wrong statement regarding
capital budgeting.
① For a business project with a
negative net present value (NPV), its internal rate of
return (IRR) must be lower than the
weighted average cost of capital (WACC)
used to evaluate the project.
② Because the NPV and IRR of mutually
exclusive projects can give opposite results,
entirely depending on the IRR method to
choose a business project can minimize
the risk of misjudgment.
③ The big difference between the NPV
and...

The net present value (NPV) and internal rate of return (IRR)
methods of investment analysis are interrelated and are sometimes
used together to make capital budgeting decisions.
Consider the case of Blue Hamster Manufacturing Inc.:
Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of
its planning and financial data when both its main and its backup
servers crashed. The company’s CFO remembers that the internal rate
of return (IRR) of Project Delta is 11.3%, but he can’t recall how...

The net present value (NPV) and internal rate of return (IRR)
methods of investment analysis are interrelated and are sometimes
used together to make capital budgeting decisions.
Consider the case of Blue Hamster Manufacturing Inc.:
Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of
its planning and financial data when both its main and its backup
servers crashed. The company’s CFO remembers that the internal rate
of return (IRR) of Project Delta is 11.3%, but he can’t recall how...

The net present value (NPV) and internal rate of return (IRR)
methods of investment analysis are interrelated and are sometimes
used together to make capital budgeting decisions.
Consider the case of Blue Hamster Manufacturing Inc.:
Last Tuesday, Blue Hamster Manufacturing Inc. lost a portion of
its planning and financial data when both its main and its backup
servers crashed. The company’s CFO remembers that the internal rate
of return (IRR) of Project Delta is 11.3%, but he can’t recall how...

The net present value (NPV) and internal rate of return (IRR)
methods of investment analysis are interrelated and are sometimes
used together to make capital budgeting decisions.
Consider the case of Green Caterpillar Garden Supplies Inc.:
Last Tuesday, Green Caterpillar Garden Supplies Inc. lost a
portion of its planning and financial data when both its main and
its backup servers crashed. The company’s CFO remembers that the
internal rate of return (IRR) of Project Zeta is 14.6%, but he
can’t...

Braun Industries is considering an investment project which has
the following cash flows: Year Cash Flow 0 -$1,000 1 400 2 300 3
500 4 400 The company's WACC is 10 percent. What is the project's
payback, internal rate of return, and net present value? Select
one: a. Payback = 2.6, IRR = 21.22%, NPV = $300. b. Payback = 2.6,
IRR = 21.22%, NPV = $260. c. Payback = 2.4, IRR = 10.00%, NPV =
$600. d. Payback =...

2. A company is considering a project that has the following
cash flows: C0 = -3,000, C1 = +900, C2 = +500, C3 = +1,100, and C4
= +1,900, with a risk-adjusted discount rate of 8%. A) Calculate
the Net Present Value (NPV), Internal Rate of Return (IRR),
Modified Internal Rate of Return (MIRR), and Profitability Index
(PI) of this project. B) If you were the manager of the firm, will
you accept or reject the project based on the...

You are considering building a shopping mall. The initial
investment is ?$1.43. million. The cash flows are?$410,000
for year? 1,200,000 for year?2, $200,000 for year? 3, and
?$170,000 for year 4. What are the net present value? (NPV) and
profitability index? (PI) of the project if the cost of capital is
12?%? Compute the internal rate of return? (IRR) for the
project.

The net present value (NPV) and internal rate of return (IRR)
methods of investment analysis are interrelated and are sometimes
used together to make capital budgeting decisions.
Consider the case of Cold Goose Metal Works Inc.:
Last Tuesday, Cold Goose Metal Works Inc. lost a portion of its
planning and financial data when both its main and its backup
servers crashed. The company’s CFO remembers that the internal rate
of return (IRR) of Project Omicron is 13.8%, but he can’t...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 7 minutes ago

asked 7 minutes ago

asked 8 minutes ago

asked 15 minutes ago

asked 17 minutes ago

asked 18 minutes ago

asked 21 minutes ago

asked 21 minutes ago

asked 21 minutes ago

asked 21 minutes ago

asked 21 minutes ago

asked 29 minutes ago