Common technique for evaluating most capital investments

Assignment Help Financial Management
Reference no: EM131303469

Topic —Capital Budget   

MULTIPLE CHOICE

1. The most common technique for evaluating most capital investments is(are) a. payback period b. discount payback period c. internal rate of return d. net present value ANS:   

2. Suppose a particular investment project will generate an immediate cash inflow of $1,000,000 followed by cash outflows of $500,000 in each of the next three years. The project’s IRR is 23% and the company uses a discount rate of 15%, compute the NPV for this project.

Should the company accept this project? a. No; reject the project b. Yes; accept the project c. IRR does not matter d. Insufficient information ANS:   

The project has an initial cash inflow and subsequent cash outflows yielding a negative NPV, although its IRR is higher than the discount rate, the firm should reject the project.

3. A firm is evaluating two investment proposals. The following data is provided for the two investment alternatives.

Initial cash outflow IRR NPV Project 1 $250m 28% $80m Project 2 $ 50m 36% $20m   

a. The discount rate for the two projects is 18%. If the two projects are independent, which project should the firm choose based on the IRR rule? a. project 1 b. project 2 c. both projects d. cannot decide because the hurdle rate is unknown ANS: C The discount rate represents the hurdle rate in the NPV computation which is 18%. Both projects pass the hurdle rate or are greater than the discount rate. b. If the two projects are mutually exclusive, using the IRR method which project should the firm accept? a. project 1 b. project 2 c. both projects d. cannot decide because the hurdle rate is unknown.

Reference no: EM131303469

Questions Cloud

What is the current share price : Estes Park Corp. pays a constant $8.60 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share pr..
What is the firms market value capital structure : Titan Mining Corporation has 8.4 million shares of common stock outstanding and 280,000 6 percent semiannual bonds outstanding, par value $1,000 each. What is the firm's market value capital structure? If the company is evaluating a new investment pr..
Calculate the net present value with a required return : Calculate the net present value with a required return of 8%, an initial investment of $45,000, and cash flows of $12,000, $20,000, $10,000, and $6,000 for years 1 through 4 respectively
How payments are divided in interest-principal repayment : Suppose you bought a house and took out a mortgage for $50,000. The interest rate is 8 percent, and you must amortize the loan over 10 years with equal end-of-year payments. Create a bar chart that shows how the payments are divided between interest ..
Common technique for evaluating most capital investments : The most common technique for evaluating most capital investments is(are). Suppose a particular investment project will generate an immediate cash inflow of $1,000,000 followed by cash outflows of $500,000 in each of the next three years. The project..
Digital storage devices has been granted options : Lisa Sweet, the CEO of Digital Storage Devices has been granted options on 300,000 shares. The stock is currently trading at $27 a share and the options are at the money. The volatility of the stock has been about .15 on an annual basis over the last..
What interest rate did the he receive on this investment : An investor was afraid that he would become like King Lear in his retirement and beg hospitality from his children, so he purchased grain "tithes," or shares in farm output, for 600 pounds. The tithes paid him 68 pounds per year for 30 years. What in..
Conflicts of interest between shareholders and bondholders : The central issue of corporate governance how to protect creditors from managers and controlling shareholders how to protect outside investors from controlling insiders how to alleviate the conflicts of interest bewteen managers and shareholders how ..
Vehicles expected life of three years as delivery vehicle : You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $22,500 to purchase and which will have OCF of –$2,900 annually throughout the vehicle’s expected life of three years as..

Reviews

Write a Review

 

Financial Management Questions & Answers

  What are the consequences to them of this liability

When Vivienne and Paul Jensen’s daughter Heather turned sixteen, they signed a form allowing her to get a driver’s license. Two weeks after she received her license, Heather crashed the family car into a tree. He friend Rebecca, who was in the passen..

  How does dell operate with such low current ratio

Discuss how Dell can operate with such a historically low current ratio, why it does so and what safeguards you would have as a financial manager to prevent this from becoming a crisis. Why does Dell operate with such a low current ratio? What safegu..

  What should current rate be on two year treasury securities

One-year Treasury bills currently earn 3.85 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 4.05 percent. The liquidity premium on 2-year securities is 0.10 percent. If the liquidity theory is correct, what sho..

  What is the stock price for each company

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.30 next year. The growth rate in dividends for all three companies is 5 percent. The required return for each company’s stock is 7 percent, 10 percent, and 13 percent, respectiv..

  What is the current value of the future payments

Mr. Sampson will receive $6,500 a year for the next 14 years from his trust. If an 8 percent interest rate is appropriate: What is the current value of the future payments? What is the current value, if they are received at the beginning of each year..

  Statements is true of zero coupon bonds

Which of the following statements is true of zero coupon bonds?

  Simply supported beam loaded by two forces

A simply supported beam loaded by two forces is shown in the figure. Select a pair of structural steel channels mounted back to back to support the loads in such a way that the deflection at midspan will not exceed ' in and the maximum stress will no..

  Cost of preferred stock capital

ABC Telecom Inc.has preferred stock that pays a dividend of $5 per share and sells for $100 per share. It is considering issuing new shares of preferred stock. These new shares incur an underwriting ( or flotation ) cost of 2.2%. How much will ABC Te..

  What is the current value of this stock

The last dividend paid by Lynwood Properties was an annual dividend of $1.20 a share. Dividends for the following 4 years will be increased at an annual rate of 12 percent. After that, dividends are expected to increase by 2 percent each year. The di..

  Cash flow in actual dollars and cash flow with inflation

Purchasing a Milling machine will cost $95,000. Installing the machine cost $15,000. Installiation and milling machine cost go together. Special tools that need purchasing cost $10,000. The Milling machine has a lifetime of 10 years. Determine the ca..

  Donors gross estate for federal estate tax purposes

Which of the following is (are) among the exceptions to the general rule that property given within three years of death is excluded from the donor’s gross estate for federal estate tax purposes?

  What is the default risk premium on bonds

Koy Corporation's 5-year bonds yield 7%, and 5-Year T-bonds yield 5.15%. The real risk-free rate is r*=3%, the inflation premium for 5=year bonds is IP=1.75%, the liquidity premium for Koy s bonds is LP=.75% versus zero for T-bonds, and the maturity ..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd