Chapter 11 - Name: Nguyen Thi Lan Thanh Student ID: 1236311...

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Name: Nguyen Thi Lan Thanh Student ID: 1236311 Class: Friday Morning CHAPTER 11 Questions 11.1/ How are project classifications used in the capital budgeting process? Project classifications are used to indicate how much analysis is required to evaluate a given project, the level of executive who must approve the project, and the cost of capital that should be used to calculate the project’s NPV. Thus, project classifications can increase the efficiency of the capital budgeting process. 11.7/ Why might be rational for a small firm that does not have access to the capital markets to use the payback method rather than the NPV method? The payback method is a “break-even” calculation in the sense that if cash flows comes in at the expected rate, the project will break even. The payback methods have faults as ranking criteria; they do provide information about liquidity and risk. The shorter the payback, other things held constant, the greater the project’s liquidity. This factor is often important for smaller firms that don’t have ready access to the capital to capital markets. Problems 11.7/ CAPITAL BUDGETING CRITERIA A firm with 14% WACC is evaluating two projects for this year’s capital budget. After-tax cash flows, including depreciation, are as follows: Project A Project B a. Calculate NPV, IRR, MIRR, payback, and discounted payback for each project. b. Assuming the projects are independent, which one(s) would you recommend? c. If the projects are mutually exclusive, which would you recommend? d. Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
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This note was uploaded on 11/23/2011 for the course MANAGEMENT 101 taught by Professor Nguyen during the Spring '11 term at Troy.

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Chapter 11 - Name: Nguyen Thi Lan Thanh Student ID: 1236311...

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