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Chapter 11 Homework Questions

Capital Budgeting
1.

What is the payback period for a $21,000 project that is expected to return $6000 for the first three years and $4000 for years four
through five?
a. 3 3/4
b. 3
c. 4 1/4
d. 4 2/3

2.

What is the payback period for a $42,000 project that is expected to return $13,000 for the first three years and $10,000 for years
four through seven?
a. 3.3 years
b. 4 years
c. 3.5 years
d. 3.75 years

3.

What is the payback period for a $20,000 project that is expected to return $6000 for the first two years and $3000 for years three
through five?
a. 3.67 years
b. 4.76 years
c. 4.5 years
d. 4.67 years

4.

Neclerio No-Slice Golf Club Company is considering a project that has the following cash flows and a WACC of 8.25%. Find the
projects NPV and determine whether to accept or reject the project.
Year:
Cash flows:
a.
b.
c.
d.

0
-$25,500

1
$4250

2
$4250

3
$4250

4
$4250

5
$4250

-$8,642.21; Accept
$7,099.72; Reject
-$8,642.21; Reject
$7,099.72; Accept

5.

Chelikani Cement Co. is considering a project that has the following cash flow and WACC data. What is the projects NPV?
WACC = 12.2%
Year:
0
1
2
3
4
5
Cash flows:
-$7500
$1850
$1850
$1850
$1850
$1850
a. -$274.39
b. $1,750
c. -$864.07
d. $1,231.50

6.

MacHinery Manufacturing Company is considering a 3-year project that has a cost of $75,000. The project will generate after-tax
cash flows of $33,100 in year one, $31,500 in year two, and $31,200 in year three. Assume that the firm's proper rate of discount
is 10%. What is the project's Net Present Value?
a. $5,950
b. $21,800
c. $19,620
d. $4,565

7.

ABC Services can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five
years. Calculate the NPV of the assembler if the required rate of return is 12%.
a. $6,577
b. $1,056
c. $7,621
d. $4,568

8.

A machine costs $1,000 and has a 3 year life. The estimated salvage value at the end of three years is $100. The project will
generate after tax cash flows of $600 per year. If the required rate of return is 10%, what is the NPV of the project?
a. $1,567
b. $567
c. $900

Chapter 11 Homework Questions


Capital Budgeting
d.
9.

$492

Tapley Dental Associates is considering a project with the following cash flow and WACC data. What is the projects NPV?
Note that a projects NPV can be negative, in which case it will be rejected.
WACC = 10%
Year:
0
1
2
3
4
5
Cash flows
-$1,000 $300
$300
$300
$300
$300
a.
b.
c.
d.
e.

$116.73
$123.15
$123.15
$131.96
$137.24

You have been asked to analyze a capital investment proposal. The projects cost is $2,775,000. Cash inflows are projected to be
as follows:
Year
Cash flow
1
$925,000
2
$1,000,000
3
$1,000,000
4
$1,000,000
5
$1,225,000
10. Assume that your firm discounts projects at 15.5%. What is the projects NPV?
a. $101,247
b. $285,106
c. $473,904
d. $582,380
11. Kyle & Reap Engineering Systems is considering a project that has the following cash flow data. What is the projects
approximate IRR?
Year:
0
1
2
3
4
Cash flows:
a. 9%
b. 13%
c. 8%
d. 11%

-$18000

$5250

$6100

$5750

$5100

12. What is the IRR of a project that has a five-year economic life, an initial investment of $100,000 and annual cash inflows of
$22,000? The WACC for the project is 8.5%. Would this project be acceptable?
a. 3.26%; Acceptable
b. 3.26%; Reject
c. 5.17%; Reject
d. 5.17%; Acceptable
13. Edison Electric Systems is considering a project that has the following cash flow data. What is the projects IRR? Note that a
projects projected IRR can be less than the WACC (and even negative), in which case it will be rejected.
Year:
0
1
2
3
Cash flows:
-$1,000
$450
$470
$490
a.
b.
c.
d.
e.

16.73%
17.44%
18.89%
19.05%
20.37%

14. Initial Outlay


0
-$20,000

Cash Flow in Period


1
2
3
$7,730.85 $7,730.85 $7,730.85

4
$7,730.85

The Internal Rate of Return (to nearest whole percent) is:


a. 18%
b. 10%

Chapter 11 Homework Questions


Capital Budgeting
c.
d.

20%
16%

15. Namjoshi Engineering Systems is considering a project that has the following cash flow data. What is the projects approximate
IRR?
Year:
0
1
2
3
Cash flows:
-$14000
$5260
$6100
$5750
a. 9%
b. 13%
c. 8%
d. 11%
16. You are considering investing in a project with the following year-end after-tax cash flows:
Year 1
$5,000
Year 2
$3,200
Year 3
$7,800
If the initial outlay for the project is $12,113, compute the projects IRR.
a.
14%
b.
10%
c.
32%
d.
24%
17. Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of
$1,520.
Year
Net Cash Flow
1
$1,000
2
$1,500
3
$500
a. 32%
b. 48%
c. 28%
d. 40%
A project has an initial cost of $50,000. The incremental inflows associated with the project are $20,000 in year one, $15,000 in
years two and three, and $10,000 in year four. The appropriate discount rate for this project is 11%.
18. What is the projects NPV?
a. -$2,252
b. $2,252
c. $10,000
d. $52,252
19. What is the projects IRR?
a. 3.68%
b. 6.83%
c. 8.63%
d. 11.00%
Two projects being considered have the following projected cash flows:
Year
Project A
0
-100,000
1
50,000
2
40,000
3
30,000
4
10,000
20. What is the Payback Period for Project A?
a. 2 years
b. 2.33 years
c. 3.08 years
d. 4 years
21. What is the Payback Period for Project B?

Project B
-100,000
10,000
30,000
40,000
60,000

Chapter 11 Homework Questions


Capital Budgeting
a.
b.
c.
d.

2.33 years
2.86 years
4 years
3.33 years

22. If the cost of capital were 15%, what is the NPV of Project A?
a. $832.98
b. $7,881.98
c. $30,000.00
d. -$8,371.91
23. What is the NPV of Project B if the cost of capital were 15%?
a. -$18,750
b. $4917.70
c. $40,000.00
d. -$8,014.19
24. If the required rate of return is 15%, which would you choose?
a. Neither project
b. Project A, since it has the higher PBP
c. Project B, since it has the higher NPV
d. Project A, since it has the higher NPV
e. Project B, since it has the higher PBP
25. Which of the following capital budgeting decision criteria are correct?
a. Accept projects that have a positive NPV.
b.
Accept projects that generate an IRR that is greater than the firms discount rate.
c.
Accept projects that generate an IRR that is less than the current T-bill rate.
d.
All the above.
e.
Only A and B.
26. NPV represents:
a. the dollar profits added to the firm discounting at the cost of capital
b. the percentage return of the project
c. the percentage change represented by the project
d. the dollar change in firm value resulting from undertaking a project