Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,450,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company’s WACC is 8%, and project Delta has the same risk as the firm’s average project.   The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $325,000 Year 2 $450,000 Year 3 $425,000 Year 4 $450,000   Which of the following is the correct calculation of project Delta’s IRR? 4.37%   5.40%   4.88%   5.14%     If this is an independent project, the IRR method states that the firm should    .   If the project’s cost of capital were to increase, how would that affect the IRR? The IRR would not change.   The IRR would increase.   The IRR would decrease.

Berdwen, Inc. is analyzing the merits of a potential project. There is great volatility in the marketplace which will impact the project with risky free cash flows. Berdwen, Inc. has a weighted average cost of capital of 15.2%, and forecasts the free cash flows below:   Year Expected FCF 0 -$10,000 1 $16,150 2 -$5,500   Use two appropriate capital budgeting techniques to determine if this project should be accepted.

During the past few years, Super Technologies has been too constrained by the high cost of capital to make many capital investments.  Recently, though, capital costs have been declining and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department.  As the assistant to the financial vice-president, it is your task is to estimate Super’s weighted average cost of capital (WACC).  The VP has provided you with the following information:   The firms’ tax rate is 40%.             The current market price of Super’s outstanding bonds is $1,153.72.  The bonds have an annual coupon rate of 12% and make coupon payments semiannually.  The bonds mature in 15 years and have a par value of $1,000.             The current price of the firm’s preferred stock is $113.10 per share.  The stock has a $100 par value and a 10% annual dividend rate (paid annually).             The current price of the firm’s common stock is $50 per share.…

OPPfel Hospitality Consulting Inc. has two similar financial projects to offer one of its corporate clients in the hospitality industry. OPPfel wants to evaluate a set of capital budgeting projects and come up with the best decision according to the project’s IRR and PI for the client. NINV and NCF data for both of the projects are shown in the data table below: Year Project AR Project BF 0 -$100,000 -$100,000 1 $70,000 $20,000 2 $60,000 $50,000 3 $20,000 $100,000 If the minimum required rate of return is 10.00% for both of the capital budgeting projects, which one of the projects provides a better investment decision that OPPfel can consult to the its client?

Which of the following would you NOT consider when making a capital budgeting decision? A. the change in direct labor expense due to the purchase of a new machine B. the cost of a marketing study completed last year C. the opportunity to lease out a warehouse instead of using it to house a new production line D. the additional taxes a firm would have to pay in the next year

The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.2 percent to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $63,000 and projected cash inflows of $19,000 in Year 1, $34,000 in Year 2, and $28,000 in Year 3. The firm uses 33 percent debt and 67 percent common stock as its capital structure. The company's cost of equity is 13.8 percent while the aftertax cost of debt for the firm is 5.7 percent. What is the projected net present value of the new project? Multiple Choice O O -$409 -$308 $427 $573