Capital Budgeting

Corporate finance – Capital budgeting thumbnail

1. Which of the following statements is least likely true?

 
 
 

2. Which statement about two mutually exclusive projects is most accurate?

 
 
 

3. Under which circumstances the payback period and discounted payback period would end up being equal?

 
 
 

4. Calculate the payback period for the following project A:

Year 0 1 2 3 4
Cash Flow ($75,000.00) $45,000.00 $20,000.00 $15,000.00 $10,000.00
 
 
 

5. Which of the following statements about the NPV and the IRR is most likely true?

 
 
 

6. Given the following information about two independent projects- A and B, what should an analyst decide? Assume the opportunity cost of capital for both projects is equal to 7%:

Year Year-end Cash flows Project A Year-end Cash flows Project B
0 ($5,000.00) ($3,000.00)
1 $2,500.00 $1,500.00
2 $3,500.00 $2,500.00
 
 
 

7. Which of the following statements is least likely true?

 
 
 

8. Calculate the NPV for Project B which has the following cash flow structure. Assume 10% required rate of return.

Year 0 1 2 3 4 5
Cash Flow ($5,000.00) $3,500.00 $2,000.00 $1,500.00 $1,000.00 $500.00
 
 
 

9. Using a financial calculator or a spreadsheet model, calculate the IRR of the following investment:

Year 0 1 2
Cash Flow ($75,000.00) $45,000.00 $55,000.00
 
 
 

10. Which of the following statements about the NPV profiles of two projects is most accurate?

 
 
 

11. Calculate the average accounting rate of return (AAR) for the following project. Assume that the initial investment of $100 will be depreciated using straight-line over 2 years and the salvage value will be 0.

Net income

2018 2019
Sales $100 $105
Cash expenditure $35 $45
Depreciation $50 $50
EBT $15 $10
Taxes @ 40% $6 $4
Net income $9 $6
 
 
 

12. Calculate the profitability index (PI) for the following cash flow structure. Assume the required rate of return is equal to 10%.

Year 0 1 2 3
Cash Flow ($5,000.00) $3,500.00 $2,000.00 $1,500.00
 
 
 

13. Which of the following projects is most likely to have a ‘problem’ when we calculate its IRR?

 

 
 
 

14. Examine the following information about two mutually exclusive projects A and B. Which of the two projects is most likely to be selected?

0 1 2 3 4 NPV IRR
Project A (400) 160 160 160 160 118.36 21.86
Project B (400) 0 0 0 800 166.74 18.92
 
 
 

15. John is concerned that the project he’s been assigned to evaluate might have multiple IRRs.

0 1 2 3 4 5
Project X ($1,000,000) $1,000,000 $1,100,000 $1,300,000 $1,000,000 -$3,700,000

How many discount rates result in a zero NPV for this particular project?

 
 
 

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