1. Which of the following statements is CORRECT?
a. The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. b. The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. c. The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. d. The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. e. The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

2. Projects A and B have identical expected lives and identical initial cash outflows (costs). However, most of one project’s cash flows come in the early years, while most of the other project’s cash flows occur in the later years. The two NPV profiles are given below: Which of the following statements is CORRECT?

a. More of Project A’s cash flows occur in the later years. b. More of Project B’s cash flows occur in the later years. c. We must have information on the cost of capital in order to determine which project has the larger early cash flows. d. The NPV profile graph is inconsistent with the statement made in the problem. e. The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project’s IRR.

3. Suppose a firm relies exclusively on the payback method when making capital budgeting decisions, and it sets a 4-year payback regardless of economic conditions. Other things held constant, which of the following statements is most likely to be true? a. It will accept too many short-term projects and reject too many long-term projects (as judged by the NPV). b. It will accept too many long-term projects and...

...CHAPTER 10
CAPITAL BUDGETING
FOCUS
Our focus in this first capital budgeting chapter begins with the time value concepts behind methods and then moves on to computational and decision making techniques. The problems of cash flow estimation and risk encountered in practice are touched upon here in anticipation of a detailed treatment in a later chapter.
PEDAGOGY
A brief overview of the cost of capital concept is presented early in the chapter even though it is the subject of Chapter 13. The knowledge is necessary to understand and motivate the capital budgeting models. It relates NPV - IRR procedures to the required rate of return idea, something with which students are already familiar.
We explicitly tie NPV and IRR together by emphasizing that the IRR comes from the NPV equation as the interest rate that sets NPV=0. This helps to develop an overall understanding of both procedures.
TEACHING OBJECTIVES
After this chapter students should:
1. appreciate the discounted cash flow basis of capital budgeting theory, and
2. be able to make the computations associated with the major capital budgeting techniques.
They should also be marginally aware of the difficulties associated with estimating cash flows and differences in project risk. Along these lines, care should be taken not to form the impression that capital budgeting is an engineering-like process that always gives exactly the right answer....

...homework #10, 3050
Student: ____________________________________________________________
_______________
1. The invoice price of a bond is the ______.
A. stated or flat price in a quote sheet plus accrued interest
B. stated or flat price in a quote sheet minus accrued interest
C. bid price
D. average of the bid and ask price
2. A mortgage bond is _______.
A. secured by other securities held by the firm
B. secured by equipment owned by the firm
C. secured by property owned by the firm
D. unsecured
3. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3% and 4% over the next three years. The total annual coupon income you will receive in year three is _________.
A. $30.00
B. $33.00
C. $32.78
D. $30.90
4. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________.
A. 6.00%
B. 6.58%
C. 7.20%
D. 8.00%
5. A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________ (to the nearest dollar).
A. $1,000
B. $1,063
C. $1,081
D. $1,100
6. A coupon bond pays semi-annual interest is reported as having an ask price of 117% of its $1,000 par...

...Sample Questions Ch. 10
1- The possibility that errors in projected cash flows can lead to incorrect NPV estimates is called:
A) Forecasting risk.
B) Projection risk.
C) Scenario risk.
D) Monte Carlo risk.
E) Accounting risk
2- An analysis of what happens to NPV estimates when we ask what-if questions is called:
A) Forecasting analysis.
B) Scenario analysis.
C) Sensitivity analysis.
D) Simulation analysis.
E) Break-even analysis
3- An analysis of what happens to NPV estimates when only one variable is changed is called:
A) Forecasting analysis.
B) Scenario analysis.
C) Sensitivity analysis.
D) Simulation analysis.
E) Break-even analysis.
4- An analysis of the relation between sales volume and various measures of profitability is called:
A) Forecasting analysis.
B) Scenario analysis.
C) Sensitivity analysis.
D) Simulation analysis.
E) Break-even analysis.
5- Variable costs _________________________.
A) change as a function of the quantity of output produced
B) (for a given time period) are constant no matter the quantity of output produced
C) change as a function of the next unit of output produced
D) comprise the sum total of all production expenses of the firm for some time period
E) comprise the sum total of all production expenses of the firm for some time period, expressed relative to the total output produced for that same time period
6- Fixed costs __________________________.
A) change as a...

...
Chapter 13:
13.4 CF0 = (110,000) ; CF1-CF10 = 19,000 ; WACC = 10%
NPV = 6,746.78 ; The company should replace the old machine for a new one.
13.6 Year 0 Net Cash Flow = Machine Price + Cost of Install + Increase in Net Working Capital
Year 0 = $1,080,000 + $22,500 + $15,500 = ($1,118,000)
Depreciation Year 1 = ($1,080,000 + $22,500) x 0.3333 = $367,463
Depreciation Year 2 = ($1,080,000 + $22,500) x 0.4445 = $409,061
Depreciation Year 3 = ($1,080,000 + $22,500) x 0.1481 = $163, 280
Net Operating Cash Flow for Year 1 = $375,612 ; Year 2 = $418,521 ; Year 3 = $304,148
Book Value of the Asset = ($1,080,000 + $22,500) – ($367,463 + $490,061 + $163,280) = $81,696
Net Gain = (($605,000) – ($81,696)) x (1- 0.35) = $340,147
After-tax Net Salvage Value = $81,696 + $340,147 = $421,843
Additional Cash Flow = $421,843 + $15,500 = $437,343
Cash Flow in Year 3 = $304,148 + $437,343 = $741,491
NPV = -$1,118,000 + $335,368 + $333,642 + $527,779 = $78,789
13.8 NPV = $21,780 (1 + 0.06) - $150,000 = $106,520
0.15 – 0.06
Since NPV is positive, the firm should accept the project.
13.10 After tax increase in earnings = Increased earnings x (1 – Tax Rate)
= $47,000 x (1 – 0.40) = $28,200
Depreciation using MACRS:
Year 1 = $182,500 x 20% = $36,500 x 40% = $14,600
Year 2 = $182,500 x 32% = $58,400 x 40% = $23,260
Year 3 = $182,500 x 19.20% = $35,040 x 40% = $14,016
Year 4 = $182,500 x 11.52% = $21,024 x 40% = $8,409.6
Year 5 =...

...tools employ today. Second, since systems developme nt is super complex, DFDs and flowcharts ar! e tools that are used to fix order from sanatorium and complexity.Â (Ch 3, p. 50)| | | Â | Points Received:| 4 of 5| Â | Comments:| First, data flow diagrams and flowcharts are the two most frequently used development and documentation tools used today. Second, since systems development is extremely complex, DFDs and flowcharts are tools that are used to create order from chaos and complexity.| |
TCO 1) Name two reasons why it is important to have a working knowledge of DFDs and flowcharting. (Points TCO 1) Name two reasons why it is important to have a working knowledge of DFDs and flowcharting. (Points
The flow diagram and the flowcharts are the two more common systems use. Also when it comes to the system development they can get very complex meaning that the DFD and the flowchart are tools that can be used to create order form chaos and complexity.
TCO 1) What is the purpose behind the five primary activities in the value chain?
First, info flow diagrams and flowcharts argon the two most much utilize development and musical accompaniment tools employ today. Second, since systems developme nt is super complex, DFDs and flowcharts ar! e tools that are used to fix order from sanatorium and complexity.Â (Ch 3, p. 50)| | | Â | Points Received:| 4 of 5| Â | Comments:| First, data flow diagrams and flowcharts are the two most frequently used...

...CHAPTER 10
Cash Flows and Other Topics
in Capital Budgeting
ANSWERS TO
END-OF-CHAPTER QUESTIONS
10-1. We focus on cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. Only by examining cash flows are we able to correctly analyze the timing of the benefit or cost. Also, we are only interested in these cash flows on an after tax basis as only those flows are available to the shareholder. In addition, it is only the incremental cash flows that interest us, because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project.
10-2. Although depreciation is not a cash flow item, it does affect the level of the differential cash flows over the project's life because of its effect on taxes. Depreciation is an expense item and, the more depreciation incurred, the larger are expenses. Thus, accounting profits become lower and, in turn, so do taxes, which are a cash flow item.
10-3. If a project requires an increased investment in working capital, the amount of this investment should be considered as part of the initial outlay associated with the project's acceptance. Since this investment in working capital is never "consumed," an offsetting inflow of the same size as the working capital's...

...ROLE AND PURPOSE This subject aims to introduce to students a range of basic concepts and ideas in modern finance. After completing this subject, participants should know the principles involved in making investment and financing decisions, understand functions of financial markets and financial managers, and possess basic knowledge of option pricing and financial planning. This foundation course prepares students for more in‐depth studies at a later stage. LEARNING OUTCOMES Upon completion of the subject, students will be able to: a. Understand the role of financial managers and the functions of the financial market; b. Understand the concept of present value and its applications in investment appraisal; c. Understand the risk‐return relation and the determination of cost of capital; d. Possess broad knowledge of financing decision‐making under uncertainty and conditions of market imperfection; e. Apply basic finance theory to solve practical problems. ASSESSMENT METHODS
Specific assessment methods/tasks Continuous Assessment 1. Written Assignment (15%) and Tutorial Participation (5%) 2. Midterm Test Final Examination Total % weighting 50% 20% 30% 50% 100 % √ √ √ √ √ √ √ √ √ √ √ √ √ Intended subject learning outcomes to be assessed a b c d e
Note that under the Double-D policy, students have to obtain at least a “D” in both continuous assessment and final examination in order to pass the course. 1
WRITTEN ASSIGNMENT As required by the...

...Final Finance Exam Notes
Definitions:
1. Capital Budgeting is the process of evaluating proposed large, long-term investment projects.
Capital budgeting is primarily concerned with evaluating investment alternatives.
The first step in the capital budgeting process is idea development.
A characteristic of capital budgeting is the internal rate of return must be greater than the cost of capital.
One of the simplest capital budgeting decision method is the payback method.
Capital budgeting techniques are usually used only for projects with large cash outlays.
2. Payback period is the number of time periods it will take before the cash inflows of a proposed project equal the amount of the initial project investment (a cash outflow). The payback period is calculated by counting the number of years it will take to recover the cash invested in a project.
3. Net present value is the dollar amount of the change in the value of the firm as a result of undertaking the project.
With non-mutually exclusive projects, the net present value and the internal rate of return methods will accept or reject the same project.
The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method assumes that cash flows are reinvested at the firm's weighted average cost of capital.
The net present value assumes returns are reinvested at the cost of capital.
If an...