# Chapter 9 - Chapter 9 1 The payback period is the exact...

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Chapter 9: 1. The payback period is the exact amount of time it takes the firm to recover its initial investment 2. A firm is evaluation a proposal which has an initial investment of \$45,000 and has cash flows of \$5,000 in year 1, \$20,000 in year 2, \$15,000 in year 3, and \$10,000 in year 4. The payback period of the project is 3.5 years. 3. All of the following are examples of sophisticated capital budgeting techniques expect payback period. 4. The internal rate of return is the discount rate that equates the present value of the cash inflows with the initial investment. 5. A firm with a cost of capital of 11% is evaluation 4 capital projects. The internal rates of return are as follows: Project 1 = 13%, Project 2 = 10%, Project 3 = 11%, and Project 4 = 15%. The firm should: accept 4,1,3, and reject 2. 6. The discount rate is the minimum amount of return that must be earned on a project in order to leave the firms value unchanged. *For questions 7 and 8, refer to the following information: A firm must choose from 5 capital budgeting proposals outlines bellow. The firm is subject to capital rationing and has a capital budget of \$500,000. The firms cost of capital is 12%. 7. Using the internal rate of return approach to ranking projects, which project should the firm accept? 1,2,3, and 5 (since NPV>0) 8. Using the net present value approach to ranking projects, which projects should the

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## This note was uploaded on 11/24/2010 for the course ACCOUNTING FINANCE taught by Professor Ozyge during the Spring '10 term at Rowan.

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Chapter 9 - Chapter 9 1 The payback period is the exact...

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