When a project's NPV exceeds zero,
The project should be accepted without any further consideration, assuming we are confident that the cash flows and the required rate of return have been properly estimated.
Which of the following capital budgeting techniques does not adjust for the riskiness of the cash flows? Payback
A(n) ____ is the return on the best alternative use of an asset, the highest return that will not be earned if funds are not invested in a particular project.
Tapley Acquisition Inc. is considering the purchase of Target Company. The acquisition would require an initial investment of $190,000, but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever. Assume the required rate of return is 15 percent. Should Tapley buy Target?
Yes, because the NPV = $10,000.
Suppose the firm's required rate of return is stated in nominal terms, but the project's expected cash flows are expressed in real dollars. In this situation, other things held constant, the calculated NPV would
Be biased downward.
The post-audit is used to
Only answers a and b are correct.
Sensitivity analysis is incomplete because it fails to consider the range of likely values of key variables as reflected in their probability distributions.
Louisiana Enterprises, an all-equity firm, is considering a new capital investment. Analysis has indicated that the proposed investment has a beta of 0.5 and will generate an expected return of 7 percent. The firm currently has a required return of 10.75 percent and a beta of 1.25. The investment, if undertaken, will double the firm's total assets. If kRF = 7 percent and the market return is 10 percent, should the firm undertake the investment? (Choose the best answer.) Correct Answer:
No; the expected return of the asset (7%) is less than the required return (8.5%).
Given the following information, what is the required cash outflow associated with the acquisition of a new machine; that is, in a project analysis, what is the initial investment outlay at t = 0?
Purchase price of new machine
Market value of old machine
Book value of old machine
Inventory decrease if new machine is installed
Accounts payable increase if new machine is installed
Required rate of return
As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:
If Denver's required rate of return is 15 percent, you would choose? Correct Answer:
You have recently accepted a one year employment term by a firm. The firm has given you the option of receiving your salary as a lump sum value of $30,000 at the end of the year or as 12 monthly payments of $2,400 starting one month after you start work. If your relevant discount rate is 2 percent per month, then which salary options would you prefer? (Ignore taxes, risk, and consumption needs.) Choose the best answer. Monthly payments, since it has the larger present value.
Regarding the net present value of a replacement decision, which of the following statements is false? Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an outflow at t = 0 (initial investment outlay). Question 3
Which of the following methods involves calculating an average beta for firms in a similar business and then applying that beta to determine the beta of its own project? Pure play method.
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