Payback period was the earliest capital budgetingthe project will break even. The equation is:selection criterion. The paybackis a "break-even" calculation in the sense that if a project's cash flows come in at the expected rate,Number ofUnrecovered cost at start of yearPayback = years prior to + Cash flow during full recovery yearfull recoveryThe shorter v a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) All dollars received in different years are given equal ✔✔✔ weight. (2) Cashflows beyond the payback year are ignored. (3) The payback merely indicates when a project's investment will be recovered. There is no necessary relationship between a given payback and investorwealth maximization.A variant of the regular payback is the discounted payback. Unlike regular payback, the discounted payback considers capital ✔✔✔ costs. However, the discounted payback still disregards cashflows beyond ✔✔✔ the payback year. In addition, there is no specific payback rule to justify project acceptance. Both methods provide information about liquidityand risk. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown onthe time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have riskcharacteristics similar to the firm's average project. Bellinger's WACC is 11%.0yearsShow All Feedback1-1,200Project AProject B -1,200What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places.► Show All Feedback2700300Show All Feedback34503854250400What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.years300750Show All FeedbackWhat is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places.yearsXWhat is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.yearsX

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Description: Payback period was the earliest capital budgetingthe project will break even. The equation is:selection criterion. The paybackis a "break-even" calculation in the sense that if a project's cash flows come in at the expected rate,Number ofUnrecovered

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Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%. 0 1 -1,200 1 2 3 1 250 400 4 Project A 700 450 Project B -1,200 300 385 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. years ►Show All Feedback 300 750 ►Show All Feedback What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years ► Show All Feedback What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. years ► Show All Feedback What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years X

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 11%. 0 1 -1,200 1 2 3 1 250 400 4 Project A 700 450 Project B -1,200 300 385 What is Project A's payback? Do not round intermediate calculations. Round your answer to four decimal places. years ►Show All Feedback 300 750 ►Show All Feedback What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years ► Show All Feedback What is Project B's payback? Do not round intermediate calculations. Round your answer to four decimal places. years ► Show All Feedback What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places. years X

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 3Q

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When evaluating a project with non-normal cash flows (cash flows change sign for at least two times during the project life), the best method to use for capital budgeting analysis is the: internal rate of return payback rule discounted payback Modified internal rate of return (MIRR)
A project has an initial cash outflow followed by three annual positive cash inflows and has a payback period of two years. What is the validity of the following statements? (1) The project always has a unique Internal Rate of Return (IRR) (2) If the Internal Rate of Return (IRR) is less than the cost of capital then the project has a positive Net Present Value (NPV) at the cost of capital Statement (1) Statement (2) True True True False False True 4. False False
1] Payback and Internal Rate of Return: A project has perpetual cash flows of C per period, a cost of I, and a required return of r. What is the relationship between the project’s payback and its IRR? What implications does your answer have for long-lived projects with relatively constant cash flows? 2] WHAT ARE THE PROBLEMS WITH IRR APPROACH TO CAPITAL BUDGETING? 3] COMPARE IRR WITH MIRR METHOD.
6. The Basics of Capital Budgeting: Payback Payback period was the earliest -Select- The-Select- a project's payback, the better the project is. However, payback has 3 main disadvantages: (1) All dollars received in different years are given -Select-weight. (2) Cash flows beyond the payback year are ignored. (3) The payback merely indicates when a project's investment will be recovered. There is no necessary relationship between a given payback and investor wealth maximization. A variant of the regular payback is the discounted payback. Unlike regular payback, the discounted payback considers -Select- ✓costs. However, the discounted payback still disregards cash flows -Select- the payback year. In addition, there is no specific payback rule to justify project acceptance. Both methods provide information about -Select- ✓and risk. Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both…
QUANTITATIVE. Fill in the following statements based on the below project financial analysis. a. The Net Present Value is b. The Return on Investment is c. The project will break even (make back its costs) in Year d. This project Created by: Praju Manageski Note: Change the inputs, such as discount rate, number of years, costs, and benefits. Be sure to Discount rate Costs Discount factor Discounted costs Benefits Discount factor Discounted benefits profitable because the ROI and NPV are both Financial Analysis for Project GGU Assume the project is completed in Year 0 Discounted benefits -costs Cumulative benefits - costs ROI 5% 10,000 1.00 10,000 0 1.00 0 (10,000) (10,000) 16% 0 0.95 2,000 0.95 1,905 Year 0 0.91 5000 0.91 4,535 1,905 4,535 (8,095) (3,560) 0 0.86 . 6000 0.86 5,183 5,183 1,623 10,000 11,623 1,623 NPV
The number of years it takes to recapture a project`s initial outlay from the discounted free cash flows is called as the pay back period Select one: True False
The Basics of Capital Budgeting: Evaluating Cash Flows: IRR A project's internal rate of return (IRR) is the that forces the PV of the expected future cash flows to equal the initial cash flow. The IRR is an estimate of the project's rate of return, and it is comparable to the on a bond. The equation for calculating the IRR is: CFt is the expected cash flow in Period t and cash outflows are treated as negative cash flows. There must be a change in cash flow signs to calculate the IRR. The IRR equation is simply the NPV equation solved for the particular discount rate that causes NPV to equal .The IRR calculation assumes that cash flows are reinvested at the . If the IRR is than the project's cost of capital, then the project should be accepted; however, if the IRR is less than the project's cost of capital, then the project should be . Because of the IRR reinvestment rate assumption, when projects are evaluated the IRR approach can lead to conflicting results from the NPV method.…
Which of the following statement about the payback period method for capital budgeting decisions is not correct? The paybackperiod method ignores the time valueof money. A shorter payback period does not always mean that one investment is more desirable than another. When the annual net cash inflow isthe same each year, the payback period = Investment required/Annual netcash inflow. When the net cash flows change from year to year, the payback period = Investment required/Average netcash inflow per year.
Which of the following statements is incorrect regarding project appraisal techniques? At IRR, the NPV of a project is equal to 0 If the IRR of a project is 8%, its NPV calculated using a discount rate greater than 8%, will be less than 0 If the NPV of a project is greater than 0, then its PI will exceed 1. If the PI of a project equals 0, then the project's initial cash outflow equals the PV of its cash inflows
Which of the following describes the NPV decision rule? Accept if the cost of the project is recouped within 3 years. Accept if the PV of the cash inflows of the project divided by the absolute value of the cost of the project is greater than one. Accept if the PV of the cash inflows from the project minus the cost of the project is greater than zero Accept if the average net income from the project divided by the average book value is greater than the target required Accept if the rate of return earned on the project is greater than the required return for the project.
With a required rate of return of 17%, the IRR of a standard capital budgeting project is equal to 19%. What does this say about this project’s NPV? Select one: a. The NPV is greater than zero. b. The NPV is equal to zero. c. The NPV is less than zero. d. The NPV is equal to the ratio given by 19% divided by 17%. e. There is not enough information to determine.
With a required rate of return of 17%, the IRR of a standard capital budgeting project is equal to 19%. What does this say about this project’s NPV? Select one: a. The NPV is greater than zero. b. The NPV is equal to zero. c. The NPV is less than zero. d. The NPV is equal to the ratio given by 19% divided by 17%. e. There is not enough information to determine. Clear my choice