Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's: Payback Net Present Value Internal Rate of Return A) No No No B) Yes Yes Yes C) No Yes Yes D) No Yes No

Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's: Payback Net Present Value Internal Rate of Return A) No No No B) Yes Yes Yes C) No Yes Yes D) No Yes No

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's:

	Payback	Net Present Value	Internal Rate of Return
A)	No	No	No
B)	Yes	Yes	Yes
C)	No	Yes	Yes
D)	No	Yes	No

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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Which of the projects according to capital budgeting are not selected Select one: a. Project with early discounted payback b. Project with lower Profitability index c. Project with early payback d. Project with higher Net Present value e. None of the option
I'm not sure if I am doing this correctly, also not sure which ones to choose for the last question.
How can I explain these?
Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR. However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project’s IRR. Consider the following situation: Green Caterpillar Garden Supplies Inc. is analyzing a project that requires an initial investment of $2,225,000. The project’s expected cash flows are: Year Cash Flow Year 1 $350,000 Year 2 –125,000 Year 3 450,000 Year 4 450,000 Green Caterpillar Garden Supplies Inc.’s WACC is 7%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): -12.63% 26.46% 30.64% 29.24% If Green Caterpillar Garden Supplies Inc.’s managers select projects based on the MIRR criterion,…
4. Modified internal rate of return (MIRR) The IRR evaluation method assumes that cash flows from the project are reinvested at the same rate equal to the IRR However, in reality the reinvested cash flows may not necessarily generate a return equal to the IRR. Thus, the modified IRR approach makes a more reasonable assumption other than the project's IRR Consider the following situation: Cold Goose Metal Works Inc. is analyzing a project that requires an initial investment of $600,000. The project's expected cash flows are: Year Year 1 Year 2 Year 3 Year 4 Cold Goose Metal Works Inc.'s WACC is 7%, and the project has the same risk as the firm's average project. Calculate this project's modified internal rate of return (MIRR): 17.50% 14.00% Cash Flow $350,000 -100,000 450,000 400,000 19.25%
Which of the following is FALSE regarding various methods of project analysis? Both NPV and IRR consider the time value of money. Average Accounting Return ignores the time value of money. Payback focuses on liquidity. O Profitability Index is able to rank projects in the situation of capital rationing. () Payback considers the time value of money. Next Page Page 17 of 3 Previous Page Submit Quiz O of 30 questions saved
5. Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product. 6. Why should the cost of capital used in capital budgeting be calculated as a weighted average of the capital component rather than the cost of the specific financing used to fund a particular project?
Amster corporation has not yet decided on its required rate of return for use in evaluation of capital budgeting projects for the current year. This lack of information prohibits Amster from calculating a project’s AARR NPV IRR ---------- --------- -------- No No No Yes Yes Yes No Yes Yes No Yes No Yes No Yes
Select all that are true with respect to the payback period for making capital investment decisions. Group of answer choices The payback period is the amount of time it takes for a project to generate breakeven income The payback period is the amount of time it takes for a project's cumulative cash flows to become zero The payback period ignores all cash flows beyond a specified required payback period The payback period ignores a project's initial investment The payback period ignores the time value of money
Suppose a firm uses the WACC as the single hurdle rate in determining the value of capital budgeting projects rather than using risk adjusted hurdle rates. Choose the statement that actually completes the sentence describing the possible outcomes for the firm: the firm will tend to Accept profitable, low risk projects and reject unprofitable, high risk projects Accept profitable, low risk projects and accept unprofitable, high risk projects Reject profitable, low risk projects and reject unprofitable high risk projects Become less risky overtime Reject profitable, low risk projects and accept unprofitable, high risk projects
The payback period The payback method helps firms establish and identify a maximum acceptable payback period that helps in capital budgeting decisions. There are two versions of the payback method: the conventional payback method and the discounted payback method. Consider the following case: Green Caterpillar Garden Supplies Inc. is a small firm, and several of its managers are worried about how soon the firm will be able to recover its initial investment from Project Delta’s expected future cash flows. To answer this question, Green Caterpillar’s CFO has asked that you compute the project’s payback period using the following expected net cash flows and assuming that the cash flows are received evenly throughout each year. Complete the following table and compute the project’s conventional payback period. Round the payback period to the nearest two decimal places. Be sure to complete the entire table—even if the values exceed the point at which the cost of the project is…