Chapter 12

Capital budgeting decisions involve a minimum time horizon of five years.

In a general sense, "cash flow" can be said to equal

The reason cash flow is used in capital budgeting is because

4) Which of the following is not a step in the capital budgeting decision-making process?

An appropriate capital budgeting process requires that the following steps be taken in which order?

a) Collection of data

b) Reevaluation and adjustment

c) Evaluation and decision making

d) Search for and discovery of investment opportunities

Which of the following is not a time-adjusted method for ranking investment proposals?

There are several disadvantages to the payback method, among them:

Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals

Technology Corp. is considering a $238,160 investment in a new marketing campaign that it anticipates will provide annual cash flows of $52,000 for the next five years. The firm has a 6% cost of capital. What should the analysis indicate to the firm's managers?

$238,160/52,000 = 4.580. Take that factor to table PV of annuity to find that 3% matches under n = 5.

Please note that this question can be solved by simple division and scanning the Present Value of an Annuity (Appendix D) because the cash inflows remain constant each period

A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, what is the net present value of project A?

Project A:

−335,000 Factor @ 6% 349,520 14,520

140,000 0.943 132,020

150,000 0.89 133,500

100,000 0.84 84,000

________________________________________

Project B:

−365,000 Factor @ 6% 431,360 66,360

220,000 0.943 207,460

110,000 0.89 97,900

150,000 0.84 126,000