Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that
apply.
The discounted payback period is calculated using net income instead of cash flows.
The discounted payback period does not take the project's entire life into account.
The discounted payback period does not take the time value of money into account.
Transcribed Image Text:Suppose Acme Manufacturing Corporation's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost;
however, she does know that the project's regular payback period is 2.5 years.
Year
Year 1
Year 2
Year 3
Year 4
Cash Flow
$350,000
$500,000
$450,000
$475,000
If the project's weighted average cost of capital (WACC) is 7%, what is its NPV?
O $334,825
$418,531
O $355,751
$397,604
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- Total project value ($) Debt Option Loan-to-value Rate (%) Interest only period (years) Amortization (years) $35,000,000.00 A 65% 3.25% 3 20 B 70% 3.25% 3 30 C 70% 3.00% 0 30 D 50% 4.25% 0 30arrow_forwardThe internal rate of return is the: discount rate that makes present value of cash inflows equal to present value of cash outflows. discount rate that causes a project's after-tax income to equal zero. discount rate that results in a zero net accounting return. rate of return required by the project's investors.arrow_forwardWhich of the following statements is FALSE? A. When evaluating a capital budgeting decision, we generally include interest expense. B. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. C. Many projects use a resource that the company already owns. O D. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.arrow_forward
- In capital budgeting decisions, are there reasons a company might choose to take a project that was NPV negative? Explain.arrow_forwardNonearrow_forwardQUESTION #1: Which of the following is a disadvantage of using the IRR method of capital budgeting over other types: A- IRR does not consider the time and value of money. B- IRR assumes reinvestment of project cash flows at the same rate as the IRR C- IRR ignores the prudent simplicity of paybacks D- None of the above QUESTION #2: The net present value (NPV) of an investment is___________. A- The present value of all benefits (cash inflows) B- The present value of all costs (cash outflows) of the project C- The present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project D- The present value of all benefits (cash outflows) minus the present value of all costs (cash inflows) of the projectarrow_forward
- NPV and IRR are two of the most important decision criteria in capital budgeting. Will NPV and IRR methods always yield the same accept/reject decision? Please elaborate and list one potential cause of ranking conflicts between NPV and IRR.arrow_forwardHow can I explain these?arrow_forwardIn a few sentences, answer the following question as completely as you can. Compare discounted cash flow (DCF) and non-discounted cash flow capital budgeting techniques. If you were to evaluate a project, which one of these techniques would you use?arrow_forward
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