test8 - Chapter 8Capital Budgeting Process and Techniques...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 8Capital Budgeting Process and Techniques MULTIPLE CHOICE 1. The capital budgeting process involves a. identifying potential investments b. analyzing the set of investment opportunities, and identifying those that will create shareholder value c. implementing and monitoring the selected investment projects d. all of the above ANS: D DIF: E REF: Introduction 2. The preferred technique for evaluating most capital investments is a. payback period b. discount payback period c. internal rate of return d. net present value ANS: D DIF: E REF: 8.1 Introduction to Capital Budgeting NARRBEGIN: Gamma Electronics Gamma Electronics Gamma Electronics is considering the purchase of testing equipment that will cost $500,000 to replace old equipment. Assume the new machine will generate after-tax savings of $250,000 per year over the next four years. NARREND 3. Refer to Gamma Electronics. Whats the payback period for the investment? a. 1.8 years b. 2.0 years c. 2.5 years d. 2.8 years ANS: B The investment requires $500,000. In its first two years, this investment generates $500,000. DIF: E REF: 8.3 Payback Methods NAR: Gamma Electronics 4. Refer to Gamma Electronics. If the firm has a 15% cost of capital, whats the discount payback period of the investment? a. 1.5 years b. 2.0 years c. 2.4 years d. 2.6 years ANS: D Present value PV of Year 1 = 250,000/1.15 = 217,391 PV of Year 2 = 250,000/1.15 2 = 189,036 PV of Year 3 = 250,000/1.15 3 = 164,379 By the end of year 3, the project produces a cumulative cash flow thats greater than $500,000. Thus the project earns back the initial $500,000 at some point during the third year. (500,000 - 217,391 - 189,036)/164,379 = 93,573/164,379 = 0.569 The discount payback period is 2.6 years. DIF: M REF: 8.3 Payback Methods NAR: Gamma Electronics 5. If Gamma Electronics has a 15% cost of capital, whats the NPV of the investment? a. $213,745 b. $185,865 c. $713,745 d. $500,000 ANS: A NPV = -500,000 + 250,000/1.15 + 250,000/1.15 2 + 250,000/1.15 3 + 250,000/1.15 4 = 213,745 DIF: E REF: 8.4 Net Present Value NAR: Gamma Electronics 6. If Gamma Electronics has a 15% cost of capital, whats the IRR of the investment? a. 23.4% b. 15.0% c. 34.9% d. 100.0% ANS: C Let r represent the IRR of the investment.-500,000 + 250,000/(1+r) + 250,000/(1+r) 2 + 250,000/(1+r) 3 + 250,000/(1+r) 4 = 0 r = 34.9% DIF: E REF: 8.5 Internal Rate of Return NAR: Gamma Electronics 7. If Gamma Electronics has a 15% cost of capital, whats the profitability index of the investment? a. 1.4 b. 0.4 c. 2.0 d. 1.0 ANS: A (250,000/1.15 + 250,000/1.15 2 + 250,000/1.15 3 + 250,000/1.15 4 )/500,000 = 713,745/500,000 = 1.4 DIF: E REF: 8.6 Profitability IndexNAR: Gamma Electronics NARRBEGIN: Exhibit 8-1 Invst Csh Prj Exhibit 8-1 The cash flows associated with an investment project are as follows: Cash Flows Initial Outflow-$70,000 Year 1 $20,000 Year 2 $30,000 Year 3 $30,000 Year 4 $30,000 NARREND 8. Refer to Exhibit 8-1. Whats the payback period of the project? If a firms cutoff payback period is 3 Refer to Exhibit 8-1....
View Full Document

Page1 / 26

test8 - Chapter 8Capital Budgeting Process and Techniques...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online