Capital Budgeting Paper 16

1

A company should use the profitability index instead of the net present value method to rank investment projects when the investments have






2

Doria Chung, controller of Nanjing Manufacturing, is evaluating two projects and wishes to do a cash flow analysis of each of the projects. Both projects have positive cash inflows starting in Year 1 and have similar initial investments. The cost of capital is expected to fluctuate during the life of the projects, and Chung has selected the net present value method for her analysis. Did Chung select the most appropriate method for her analysis?






3

The statement below that best represents the definition of capital rationing is a






4

If a project with positive after-tax cash flows for 8 years has a discounted payback period of 5 years when the cost of capital is 10%, the project has a(n)






5

Rex Company is considering an investment in a new plant, which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes. What is the discounted payback period for the investment?






6

Rex Company is considering an investment in a new plant, which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes. What is the NPV for the investment?






7

Don Adams Breweries is considering an expansion project with an investment of $1,500,000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company’s opportunity cost of capital is 12%. Ignore taxes. What is the payback period of the project?






8

Testra Foods is considering opening a new restaurant. The expected purchase price is $270,000; expected annual revenues are $150,000; and expected annual costs are $90,000, including $22,500 of depreciation. The investment has a payback period of approximately






9

For capital budgeting purposes, management would select a high hurdle rate of return for certain projects because management






10

A company uses portfolio theory to develop its investment portfolio. If the company wishes to obtain optimal risk reduction through the portfolio effect, it should make its next investment in an investment that






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