Intermediate Financial Management (MindTap Course List)
12th Edition
ISBN: 9781285850030
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 13, Problem 8Q
Summary Introduction
To discuss: Whether a firm should recognize daily cash flows in the capital budgeting process and if it doesn’t follow it would affect the biasness of end result or if so, it would affect the
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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.
How can I explain these?
Explain how inflation impacts capital budgeting analysis. Why do we care? How is NPV impacted if you neglect to adjust for inflation in the cash flows when you use a discount rate based upon market (nominal) rates. Does it make the project look better or worse? Explain fully.
Chapter 13 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 13 - Define each of the following terms:
Project cash...Ch. 13 - Prob. 2QCh. 13 - Why is it true, in general, that a failure to...Ch. 13 - Prob. 4QCh. 13 - Prob. 5QCh. 13 - Prob. 6QCh. 13 - Why are interest charges not deducted when a...Ch. 13 - Prob. 8QCh. 13 - Prob. 9QCh. 13 - Distinguish among beta (or market) risk,...
Ch. 13 - Prob. 11QCh. 13 - Talbot Industries is considering launching a new...Ch. 13 - Prob. 2PCh. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Wendys boss wants to use straight-line...Ch. 13 - New-Project Analysis
The Campbell Company is...Ch. 13 - Prob. 7PCh. 13 - Inflation Adjustments
The Rodriguez Company is...Ch. 13 - Prob. 10PCh. 13 - Scenario Analysis Shao Industries is considering a...Ch. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Prob. 3MCCh. 13 - Prob. 4MCCh. 13 - Prob. 5MCCh. 13 - Prob. 6MCCh. 13 - Calculate the cash flows for each year. Based on...Ch. 13 - Prob. 8MCCh. 13 - (1) What are the three types of risk that are...Ch. 13 - Prob. 12MCCh. 13 - Prob. 13MCCh. 13 - What is a real option? What are some types of real...
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- Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The discounted payback period improves on the regular payback period by accounting for the time value of money. For most firms, the reinvestment rate assumption in the NPV is more realistic than the assumption in the IRR. Because the MIRR and NPV use the same reinvestment rate assumption, they always lead to the same accept/reject decision for mutually exclusive projects. True or False: Sophisticated firms use only the NPV method in capital budgeting decisions.arrow_forward1. In the context of capital budgeting, what is an opportunity cost?2. Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why?3. In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?4. Suppose a financial manager is quoted as saying, “Our firm uses the stand-alone principle. Because we treat projects like minifirms in our evaluation process, we include financing costs because they are relevant at the firm level.” Critically evaluate this statement.arrow_forwardRisk in cash flow estimating for capital budgeting can be defined as: a. the chance that a cash flow will turn out to be worse than the estimate. b. the chance that a cash flow will turn out to be different than the estimate, either better or worse. c. the chance that the cash flows that turn out to be more favorable than the estimate won't totally offset the cash flows that turn out to be worse than the estimate. d. the chance that the NPV and/or IRR will turn out to be worse than the estimate. e. all of the above describe the risk in cash flow estimating.arrow_forward
- Which 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_forwardExplain what a discounted cash flow method of making capital budgeting decisions is. Why are discounted cash flow methods superior to other methods? What are the risks related to using discounted cash flow methods? What a project profitability index? What does it measure? Why is it used? What is the primary criticism of the payback and simple rate of return methods of making capital budget decisions? What are the benefits in using these methods? Should companies continue to use these methods? Why or why not? What role, if any, should qualitative factors play in capital budgeting decisions? Explain your reasoning for your answer Discuss some of the major benefits to be gained from budgeting.arrow_forwardWhich of the following statements is false? A. Net incomes are not cash flows. Financial Managers should focus on the cash flows when making capital budgeting decisions. B. Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. C. To the extend that overhead costs are fixed and will be incurred in any case, they are not incremental to the project and should be excluded in the capital budgeting analysis. D. Depreciation is not a cash expense paid by the firm. E. None of the above.arrow_forward
- With everything else held constant, which of the following events should increase the internal rate of return of a capital budgeting project? A. An increase in the cost of the asset. B. A decrease in the firm’s cost of capital. C. A decrease in the cost of operating the asset. D. A decrease in tax benefits.arrow_forwardIs it worth the effort to estimate daily project cash flows? Would doing so be helpful in the investment analysis? How would the results be negatively or positively affected?arrow_forwardThe payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Blue Hamster Manufacturing Inc.: Blue Hamster Manufacturing 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 Sigma’s expected future cash flows. To answer this question, Blue Hamster’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. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$6,000,000 $2,400,000 $5,100,000…arrow_forward
- The payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cute Camel Woodcraft Company: Cute Camel Woodcraft Company 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 Alpha’s expected future cash flows. To answer this question, Cute Camel’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 conventional payback period to two decimal places. For negative values, be sure to include a minus sign in your answer. For full credit, complete the entire table. Year 0 Year 1 Year 2 Year 3 Expected cash flow -4,500,000 $1,800,000 $3,825,000 $1,575,000 Cumulative cash flow year0? year1?…arrow_forwardYou can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. Concept or Definition Term An example of externality that can have a negative effect on a firm The cash flow at the end of the life of the project Creates value for a company because it gives the company the right but not the obligation to take future action to increase its cash flows The risk of a project without factoring in the impact of diversification A risk analysis technique that measures changes in the internal rate of return (IRR) and net present value (NPV) as individual variables are changed Marston Manufacturing Co. owns a warehouse that it is not currently using. It could sell…arrow_forwardThe payback method helps firms establish and identify a maximum acceptable payback period that helps in their capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc.: Cold Goose Metal Works 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 Beta’s expected future cash flows. To answer this question, Cold Goose’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. For full credit, complete the entire table. (Note: Round the conventional payback period to the nearest two decimal places. If your answer is negative use a minus sign.) Year 0 Year 1 Year 2 Year 3 Expected cash flow -$4,500,000 $1,800,000 $3,825,000 $1,575,000 Cumulative…arrow_forward
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