Question

11-1 How are project classifications used in the capital budgeting process?

11-2 What are three potential flaws with the regular payback method? Does the discounted payback method correct all three flaws? Explain.

11-3 Why is the NPV of a relatively long-term project (one for which a high percentage of its cash flows occurs in the distant future) more sensitive to changes in the WACC than that of a short-term project?

11-4 What is a mutually exclusive project? How should managers rank mutually exclusive projects?

11-5 If two mutually exclusive projects were being compared, would a high cost of capital favor the longer-term or the shorter-term project? Why? If the cost of capital declined, would that lead firms to invest more in longer-term projects or shorter-term projects? Would a decline (or an increase) in the WACC cause changes in the IRR ranking of mutually exclusive projects? Explain.

Answer #1

11-1

capital budgeting process is planning process of analyzing the capital project before making investment. this analysis use initial investment, cost fo capital life of project and future cash flow from project.

Various project classifications used in the capital budgeting process are mention below:

1. Net present value method

2. Internal rate of return method

3. Modified Internal rate of return method

4. Payback period method

5. Discounted payback method

6. Profitability index method.

11-2

**Payback period method**

Payback period is easy to calculate method for capital budgeting.

three potential flaws with the regular payback method is mention below:

1. It does not consider discounting factor

2. It does not consider cash flow flows after payback period

11-11 CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS
$225 $225 $50 $49 Project S costs $15,000, and its expected cash
flows would be $4,500 per year for 5 years. Mutually exclusive
Project L costs $37,500, and its expected cash flows would be
$11,100 per year for 5 years. If both projects have a WACC of 14%,
which project would you recommend? Explain

When two mutually exclusive projects are being compared, explain
why the short-term project might be ranked higher under the NPV
criterion if the cost of capital is high whereas the long-term
project might be deemed better if the cost of capital is low. Would
changes in the cost of capital ever cause a change in the IRR
ranking of two such projects? Why or why not?

11-1 If Company XYZ plans to invest in a
project with initial capital outlay $52,125, annual net cash inflow
$12,000 for 8 years, and discount rate 12%, what is the Company
XYZ’s NPA?
11-2 For the Company XYZ’s same project as in
11-1, what is the IRR for the project?
There are two projects: Project A and Project
B
Project A: CF0 = -6000;
CF1-5 = 2000; I/YR = 14.
Calculate NPV, IRR, MIRR, Payback period, and discounted payback
period...

CAPITAL BUDGETING CRITERIA
A firm with a 14% WACC is evaluating two projects for this
year's capital budget. After-tax cash flows, including
depreciation, are as follows:
0
1
2
3
4
5
Project M
-$18,000
$6,000
$6,000
$6,000
$6,000
$6,000
Project N
-$54,000
$16,800
$16,800
$16,800
$16,800
$16,800
Calculate NPV for each project. Round your answers to the
nearest cent. Do not round your intermediate calculations.
Project M $
Project N $
Calculate IRR for each project. Round your answers to two...

CAPITAL BUDGETING CRITERIA
A firm with a 13% WACC is evaluating two projects for this
year's capital budget. After-tax cash flows, including
depreciation, are as follows:
0
1
2
3
4
5
Project M
-$27,000
$9,000
$9,000
$9,000
$9,000
$9,000
Project N
-$81,000
$25,200
$25,200
$25,200
$25,200
$25,200
Calculate NPV for each project. Round your answers to the
nearest cent. Do not round your intermediate calculations.
Project M $
Project N $
Calculate IRR for each project. Round your answers to two...

PAYBACK PERIOD
Project L costs $70,000, its expected cash inflows are $15,000
per year for 11 years, and its WACC is 10%. What is the project's
payback? Round your answer to two decimal places.
b)
CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE
PROJECTS
A firm with a WACC of 10% is considering the following mutually
exclusive projects:
0
1
2
3
4
5
Project 1
-$350
$75
$75
$75
$225
$225
Project 2
-$500
$200
$200
$50
$50
$50
Which project would...

Capital Budgeting:
1. T/F If the NPV<0, the WACC > the IRR
2.T/F Salvage value is added back in to the last years projects
cash flows
3. T/F NPV is considered to be the superior method for choosing
capital budget projects
4. T/F If projects are mutually exclusive, if one has a higher
IRR choose that project over the NPV decision.
Cost of Capital
5. T/F external equity (new stock issuance) is less expensive
since it will have a flotation...

Project A has a net present value of $1,500, a payback period of
2 years, and an internal rate of return of 12%. Project
B has a net present value of $1,800, a payback period of 4 years,
and an internal rate of return of 10%. Project C has a
netpresent value of $1,750, a payback period of 3 years, and an
internal rate of return of 11%. If the projects are
mutually exclusive, which project should be undertaken?
A.
Project A because...

A firm with a 14% WACC is evaluating two projects for this
year's capital budget. After-tax cash flows, including
depreciation, are as follows:
0
1
2
3
4
5
Project M
-$9,000
$3,000
$3,000
$3,000
$3,000
$3,000
Project N
-$27,000
$8,400
$8,400
$8,400
$8,400
$8,400
Calculate NPV for each project. Do not round intermediate
calculations. Round your answers to the nearest cent.
Project M: $
Project N: $
Calculate IRR for each project. Do not round intermediate
calculations. Round your answers to...

The net present value (NPV) method estimates how much a
potential project will contribute to ____ and it
is the best selection criterion. The _____ the
NPV, the more value the project adds; and added value means a ____
stock price.
CFt is the expected cash flow at Time t, r is the
project's risk-adjusted cost of capital, and N is its life, and
cash outflows are treated as negative cash flows. The NPV
calculation assumes that cash inflows can...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 8 minutes ago

asked 13 minutes ago

asked 28 minutes ago

asked 33 minutes ago

asked 45 minutes ago

asked 53 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago